Verizon Communications 2006 Annual Report Financial Highlights (as of December 31, 2006) Consolidated Revenues (billions) Cash Flow from Continuing Operations (billions) Dividends per Share Reported Diluted Earnings per Share Adjusted Diluted Earnings per Share (non-GAAP) $88.1 $20.2 $20.4 $65.8 $69.5 $23.0 $1.54 $1.62 $1.62 $2.79 $2.65 $2.51 $2.56 $2.54 $2.12 04 05 06 04 05 06 04 05 06 04 05 06 04 05 06 Verizon Wireless Verizon Telecom Verizon Business > 2006 revenue of $38.0 billion > 2006 revenue of $33.3 billion > 2006 revenue of $20.5 billion > Most reliable wireless network > Advanced fiber network > Serves 94 percent of serves 59.1 million customers passes 6.2 million homes Fortune 500 > Network reaches more than and businesses > Connections to 2,700 cities 255 million Americans > 7 million broadband in 150 countries > Highest customer loyalty in subscribers > Global IP network large the industry: only 1.17 percent > FiOS TV service available to enough to circle the world churn per month 2.4 million homes in 10 states 18 times > Largest U.S. wireless provider (based on revenue) > Largest communications provider to the U.S. federal government Note: Prior-period amounts have been reclassified to reflect comparable results. See www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report. Verizon’s 2006 reported results include revenues and expenses from the former MCI, Inc., subsequent to the close of the merger in January 2006. Information provided in this annual report on a pro-forma (non-GAAP) basis presents the combined operating results of Verizon and the former MCI on a comparable basis. Discontinued operations include Verizon’s former directory publishing unit, which was spun-off to shareholders in the fourth quarter 2006, and the operations of Verizon Dominicana C. por A. and Telecomunicaciones de Puerto Rico Inc. following second quarter 2006 agreements to sell the businesses. The Verizon Dominicana sale closed in the fourth quarter 2006. Intra- and inter-segment transactions have not been eliminated from the business group revenue totals cited above. In keeping with Verizon’s commitment to protecting the environment, this annual report is printed on recycled paper. verizon communications inc. 2006 annual report Verizon is creating new opportunities for growth through strategic investments in technology and innovation. Our advanced networks set Verizon apart in the marketplace by delivering great communications experiences to customers wherever, whenever and however they choose. Over 100 million people around the world connect to our networks every day. > Verizon customers enjoy ultra-fast Internet connections and a vast selection of high-quality television programming over our advanced fiber-optic network. > Wireless customers talk, share text and photo messages, access the Internet and email, download music, and watch videos using the nation’s most reliable wireless network. > Business customers trust Verizon’s expansive global IP (Internet Protocol) network to securely manage and deliver their crucial business data around the world. Verizon is a leader in delivering broadband and other wireline and wireless communication innovations to mass market, business, government and wholesale customers. Around the block and around the globe, our superior high-tech networks give us a competitive edge in the growth markets of the future. Verizon operates America’s most reliable wireless network, as well as one of the most expansive wholly-owned global IP networks. In addition, we are deploying the nation’s most advanced fiber-optic network to deliver the benefits of converged communications, information and entertainment services to customers. Verizon at a glance: > Dow 30 company > 59 million wireless customers > 45 million wireline access lines > Serving 94 percent of Fortune 500 companies > 242,000 employees > Over 2,200 Verizon Wireless retail stores across the country > Employees in over 300 Verizon Business offices in 75 countries across six continents > First company to provide fiber-based digital TV to the mass market > First company to provide wide-area wireless broadband service > First commercial provider of Internet access 22 Chairman’s Letter to Shareowners verizon communications inc. 2006 annual report Ivan Seidenberg Chairman and Chief Executive Officer What we do. Verizon serves customers by building great networks. It’s what we do. We design networks, invest in technology to deploy them to customers’ homes and businesses, maintain them, and upgrade them for the future. Our networks give us a platform for innovating and delivering the great products, services, applications and con- tent that customers want. This differentiates us from competitors and allows us to marry communications, data and entertainment for customers in ways few other companies can. As we unleash our increasingly powerful high-speed broadband, global IP and mobile technologies, we accelerate our growth and drive our industry forward, which in turn creates value for shareowners and customers. This is what we believe – the conviction that guides our investment, drives our strategy and motivates our people. This belief unites our leadership team, employees and Board of Directors in our determination to be the industry’s premier network company and the leader in delivering the benefits of advanced communi- cations technologies to the marketplace. By transforming our networks for the Internet age, we are defining Verizon as a growth company. We made meaningful progress toward this goal in 2006. Our growth businesses are gaining scale and reach. In wireless, we were the first to deploy a national broadband network, which now reaches more than 200 million people. In telecom, we are upgrading our traditional copper network with the most comprehensive high-speed fiber network in the country, which will reach 18 million homes and businesses by the end of the decade. By combining our large-business organization with MCI to form Verizon Business, we now have Total Broadband Connections (millions) FiOS Internet Subscribers (thousands) FiOS TV Subscribers (thousands) 6.6 7.0 6.1 5.7 687 522 375 264 207 118 55 20 1Q06 2Q06 3Q06 4Q06 1Q06 2Q06 3Q06 4Q06 1Q06 2Q06 3Q06 4Q06 What We Do: FiOS Americans are rapidly embracing high-bandwidth services such as video downloads and photo sharing. As demand for these new applications continues to rise, Verizon’s fiber- optic broadband network is uniquely positioned to meet customers’ growing bandwidth needs for years to come. Verizon’s fiber-based FiOS Internet service offers customers ultra-fast broadband connections with current download speeds up to 50 Mbps (megabits per second) – the fastest in the market today. In addition, FiOS provides the fastest available upload speeds, allowing customers to send photos, videos and other large files. Our FiOS TV service is a superior alternative to cable and satellite, offering a broad collection of all-digital programming, more than 25 high-definition (HD) channels, and access to more than 8,000 video-on-demand titles. And because FiOS TV is delivered over Verizon's fiber network, it provides customers with industry-leading quality and reliability. The vast bandwidth of fiber allows Verizon's video network to deliver true high-definition picture and sound clarity. Greater bandwidth also means that FiOS TV provides more entertainment options, new revenue growth opportunities and a superior customer experience. The Verizon FiOS Internet Advantage: > Faster download speeds – up to 50 Mbps – means less time waiting > Verizon’s fiber-optic network provides superior reliability > Superior upstream speeds allow faster sharing of pictures, videos and other content > A wide range of broadband speeds and pricing plans to meet everyone’s needs The Verizon FiOS TV Advantage: > Faster speed and improved reliability of an all-fiber network > Wide selection of HD channels and video-on-demand titles > High bandwidth allows households to watch several HD programs at the same time > Multi-room Digital Video Recorder lets viewers watch recorded programs in different rooms verizon communications inc. 2006 annual report a high-speed backbone network that gives us unsurpassed global reach and the ability to offer advanced Internet Protocol solutions to business customers around the world. And we continue to differentiate our platforms with applications and services that make them work better, faster, more securely and more reliably for customers. By executing a strategy based on investment and innovation, we have built world-class networks that serve millions of customers at home, at work and on the move. What makes this a breakthrough moment for Verizon is the powerful inter- section of our network strengths with the trends that are creating new markets and transforming the world of business, entertainment and communications. 80 60 40 20 0 2006 will go down as the year that users took over the Internet. U.S. Broadband Households (millions) Actual Forecast 81.5 00 01 02 03 04 05 06 07 08 09 10 11 Y E A R Blogs. Podcasts. YouTube. Wikipedia. MySpace. Open-source software. People Source: Forrester Research, Inc., June, 2006 creating a shared chronicle of daily life by swapping photos, music, opinions, expe- riences with friends, families, even strangers. Businesses in constant dialogue with customers, employees and partners – worldwide, 24x7. This kind of user-generated, interactive, multimedia content is increasingly U.S. Multi-PC Households (millions) dominating the marketplace – a sweeping trend known as “Web 2.0.” The Internet Actual Forecast is rapidly evolving from a text-based to a visual medium, which requires networks that deliver much higher bandwidth both upstream and downstream. Providing millions of customers the high-speed communications tools they need to par- ticipate in this global conversation is one of the great business opportunities of a generation. 80 60 40 20 0 73.8 Verizon builds the real networks on which these social networks depend. Together, our broadband, mobile and global IP networks comprise a powerful 00 01 02 03 04 05 06 07 08 09 10 11 Y E A R Source: Forrester Research, Inc., June, 2006 delivery system for the media-rich, interactive content that is transforming tele- vision, the Internet, commerce, medicine and education as we know them today. Verizon is at the heart of this creative, disruptive, market-making shift – delivering high-definition content, helping people and businesses collaborate, and making it all work together for customers, on any screen, wherever they are. Not only does this create value for us, it also pushes the industry forward by fueling inno- vation in consumer electronics, equipment manufacturing, content, software and search – all along the value chain. Verizon’s leadership in these transformational technologies gives us an engine for growth and makes us an indispensable driver of the 21st century economy. How we’re performing. Our 2006 results demonstrate that we are executing our strategy and turning opportunity into profitable growth and value creation for shareowners. Operating revenues for 2006 were $88.1 billion, a 26.8 percent increase over 2005. On a pro forma basis – that is, as if Verizon and MCI had been a single company since 2005 – revenues grew by 3.3 percent on the year, with an increasing share coming from growth businesses, and operating income margins were 16.1 percent, also up year-over-year. We strengthened our balance sheet by reducing debt by $1.9 billion, even while absorbing $6 billion of debt in the MCI transaction. We focused on our core network businesses by disposing of non-network assets, such as Verizon Information Services – now trading on the New York Stock Exchange as Idearc – and our investment in the Dominican Republic. We also paid $4.7 billion in dividends and repurchased approximately $1.7 billion in Verizon shares. Reported earnings for 2006 were $6.2 billion, or $2.12 per share. Before special items, earnings were $7.4 billion, or $2.54 per share. Our total return for 2006 was 34.6 percent. This performance is especially significant since we sold or spun off assets that, while no longer strategic to our network focus, generated substantial earnings and cash. Idearc has also appreciated in value since the spin-off, so inves- tors who own both stocks have enjoyed an even higher total return. It was also good to see that the overall industry – wireless, telecommunications, cable and on- line services – was healthier in 2006 than it has been in some time. We invested $17.1 billion in our networks to differentiate our products and ser- vices, deliver quality growth and expand our relationships with customers. With its emphasis on network quality and a record of innovation, Verizon Wireless continued to post the best results in the industry in 2006: the highest revenue growth, at 17.8 percent; the highest operating margins, at 25.2 percent; the highest number of new customers, at 7.7 million; the most retail customers, at 56.8 million; and the most loyal customers, as indicated by our industry-leading customer turnover of 1.17 percent. 2006 Total Return Verizon S&P 500 40% 30% 20% 10% 0% -10% 34.6% 15.8% 12/31/05 03/31/06 06/30/06 09/30/06 12/31/06 return of .6% excludes the idearc spin-off and includes dividends. 66 $65.8 $69.5 $88.1 04 05 06 verizon communications inc. 2006 annual report What We Do: Wireless The wireless industry continues to be one of the most dynamic growth sectors in the global economy. In nearly every measure – from market share to network reliability to customer loyalty – Verizon Wireless delivered another year of superior results in 2006. Last year Verizon Wireless added 1.43% 7.7 million customers – the most in our history – to bring our total wireless Customer Turnover customer base to 59.1 million. This (percent) represents a 15 percent increase in total customers from the end of 2005. Verizon Wireless continues to set industry records for low churn, a measure of $34.3 customer loyalty, with only 1.17 percent turnover. And in the fourth quarter of 2006, Verizon Wireless quarterly revenues topped $10 billion for the first time. Full-year 2006 revenues were $38.0 billion, making Verizon Wireless the largest wireless provider in the country based on total revenues. 06 1.22% 1.14% 04 05 06 Wireless Customers (millions) 51.3 43.8 Wireless Revenues (billions) Data Customers (millions) 59.1 $38.0 $32.3 $27.7 $23.8 $16.6 04 05 06 04 05 06 04 05 The Verizon Wireless Advantage: > Most reliable wireless voice and data network in the nation > Recognized by publications and industry organizations for the best customer service > Highest customer loyalty in the industry > Over 2,200 Verizon Wireless retail stores across the country > Portfolio of innovative wireless devices for consumers and businesses > Industry-leading operating income margins the verizon Wireless “cherry chocolate” music phone Much of this growth comes from our leadership in wireless data, which in 2006 accounted for $4.5 billion in revenues. We ended the year with 34.3 million retail data customers. With V CAST services and other high-speed applications, Verizon Wireless is transforming the cell phone into a multimedia device capable of deliver- ing music, Internet access, video and locator services. This gives us enormous room for growth as we market these services to our loyal customer base. We closed our merger with MCI in January 2006 to form Verizon Business. In its first year of operation, Verizon Business staked out a strong competitive posi- tion among multinational customers. The superior global IP capabilities that MCI brought to the table give us a particularly strong position in the high-growth end of the large-business market. Verizon Business was the only U.S.-based large business carrier to show quarter-over-quarter revenue growth, fueled by 27.3 percent growth in strate- gic services such as advanced IP services, virtual private networks and managed network services. Our industry-leading global network allows us to offer ultra-long- haul, converged packet access and other advanced capabilities demanded by these sophisticated customers. We also achieved $600 million in merger synergies, which exceeded our target, and raised our objective for 2007 to $900 million. Our principal goal in Verizon Telecom is to transform our telecom franchise into a broadband and entertainment business. To do that, we are investing in a fiber network capable of delivering two-way, high-definition broadband and video services at speeds currently up to 50 megabits per second, all the way to homes and businesses – the fastest broadband service available in the market today. This historic project – launched in July 2004 – began to bear fruit in 2006. Our advanced fiber-optic network passed a total of 6.2 million homes and businesses by the end of the year. We expanded our FiOS brand of high-speed data services, which when combined with DSL gave us 7 million broadband customers for the year, up 35.7 percent. We also introduced FiOS TV in September 2005 and now offer video to customers in hundreds of communities across the country in competition with cable providers. Essentially, we created a complex new business from scratch in less than two years and ended 2006 with 207,000 video customers. We expect video to gain even more momentum in 2007. So 2006 was another year of solid operating performance and steady progress in transforming our company. We completed a major merger, streamlined our struc- ture, took market share, and put telecom and global business on a path to growth. U.S. HDTV Households (millions) Actual Forecast 64.0 00 01 02 03 04 05 06 07 08 09 10 11 Y E A R Source: Forrester Research, Inc., June, 2006 70 60 50 40 30 20 10 0 What We Do: Wireless Data From text messaging and music downloads to GPS navigation and Internet access, Verizon Wireless had another strong year of growth in data services. For the third consecutive year, wireless data revenues doubled over the previous year, contributing $4.5 billion in revenues in 2006. Verizon Wireless had 34.3 million retail data customers in December 2006, a 44 percent increase over fourth quarter 2005. Nearly 19 million of those customers have high-speed broadband-capable devices, including phones, PDAs, Blackberries and laptop PC cards. Verizon Wireless launched V CAST Music in early 2006, and now has 18 music-enabled phones that allow customers to browse and download songs. In March 2007, Verizon Wireless launched V CAST Mobile TV, the first true mobile TV service in the nation. To continue providing the best customer experience, Verizon is increasing wireless broadband speeds in markets throughout the country. This enhanced broadband service gives customers the ability to upload files up to six times faster than before. verizon communications inc. 2006 annual report The Verizon Wireless Data Advantage: > V CAST – the nation’s first consumer wireless broadband multimedia service > V CAST Music – the world’s most comprehensive mobile music service, with over 1.5 million songs available from the V CAST Music store > BroadbandAccess – wireless Internet access at broadband speeds > V CAST Navigator – an advanced navigation system for mobile phones > TXT Messaging – 17.7 billion messages sent over the network during 4Q 2006 > Picture Messaging – 353 million picture/video messages shared during 4Q 2006 > Get It Now – downloadable games, ring tones, and other exclusive applications and content Wireless Data Wireless Data Customers Customers (millions) (millions) Wireless Data Wireless Data Revenues Revenues (billions) (billions) 34.3 34.3 $4.5 $4.5 23.8 23.8 16.6 16.6 $2.2 $2.2 $1.1 $1.1 04 04 05 05 06 06 04 04 05 05 06 06 What We Do: Business Services Verizon Business, created in 2006 following the merger with MCI, offers large business customers advanced IP services, virtual private networks and managed network services. Verizon provides local-to-global reach over its secure global IP network to 94 percent of Fortune 500 companies. We also provide managed network services to nearly every U.S. federal government agency from the civilian and defense communities. Verizon Business’ broad and deep product portfolio has been recognized by leading industry analysts. The Verizon Business Advantage: > One of the most expansive IP backbone networks in the world > Employees in over 300 offices in 75 countries across six continents > Global IP footprint serving 2,700 cities in 150 countries > More than 200 state-of-the-art data centers in 22 countries > The Verizon Business network includes high-capacity lines that allow data transfer up to 10 gigabits per second, the fastest commercially available today > Strength in financial services, retail, high-tech, health care, federal/state/local government and education Business Revenues (billions) Strategic Services (millions) $5.0 $5.1 $5.2 $5.3 $1,006 $1,052 $941 $1,132 1Q06 2Q06 3Q06 4Q06 1Q06 2Q06 3Q06 4Q06 000 verizon communications inc. 2006 annual report Where we’re headed. Going forward, we’re focused on using the unique Verizon model to change our growth profile and drive value for customers and shareowners. We continue to restructure our assets to focus on broadband, wireless and entertainment. We have announced our plan to divest or spin off our invest- ments in Puerto Rico and Venezuela, as well as access lines in Maine, Vermont and New Hampshire. These transactions will generate cash and strengthen our strategic focus. We expect to invest between $17.5 billion and $17.9 billion in 2007 to increase the coverage, reliability and speed of our wireless, broadband and global IP net- works. Our center of gravity will continue to shift to growth products and new markets. As one of the few companies that can address customer needs across all environments and all networks – what technologists call the customer’s entire “ecosystem” – we are in a great position to use our capabilities to solve customer problems and deliver the total digital experience they are coming to expect. This is an area of real opportunity for us. Verizon’s products and services get excellent grades from customers and industry analysts, but we know we can and should be better, particularly in integrating the customer’s experience across dif- ferent media, networks and devices. We are committed to using our capabilities to deliver superior customer expe- riences. We are introducing bundled services that give customers the convenience of a single source and single bill for all their Verizon services. We have the “first- mover” advantage in introducing services that marry content and communications and deliver them to any screen the customer wants – video over wireless, Internet on television screens, whole-house networking and more. We will continue to add to the vertical capabilities of our networks, making them faster, more reliable and more interactive. By capitalizing on the breadth of our company, we can deliver integrated solutions and create the kind of compelling, differentiated customer experiences that build loyalty and competitive advantage. And we are working with a wide variety of partners to deliver their content across our three broadband networks, with the highest possible quality, safety and security. We are using our scale and structure to drive profits as well as revenues. We have shown in Verizon Wireless that a business model based on superior networks, customer loyalty and efficiency leads to year after year of margin leadership. That’s our objective for Verizon, across all our operations. To assist in that effort, we cre- ated Verizon Services Operations to help us drive a competitive cost structure and take advantage of our scale efficiencies. In addition, as we build out our fiber network, the new businesses enabled by The Verizon Foundation at a glance: $69,400,000 total funds given by the verizon this investment are growing both in revenue contribution and operating efficiency, Foundation in 2006 which means our earnings and investment returns will improve over the long term, as well. How we work. Verizon is a network company, in human as well as technological terms. In fact, with our direct relationships with millions of customers, we’re different from other companies in the Internet economy. Our relationship to customers isn’t just virtual, it’s real. Our customers don’t relate to us just through the click of a mouse. They come into our stores. They see our trucks. They talk to our service reps. They invite our technicians into their homes. They know that – with more than 240,000 employees in communities all over the country and the world – we have a vested interest in good schools, safe neighborhoods and strong local economies. That’s why the human dimension of business – customer service, ethics, values, reputation and community investment – is so deeply embedded in our culture and so profoundly important to our success. Our people have a strong record of giving back to communities through matching gifts, volunteer hours and other activities, and our commitment to corporate social responsibility is visible in all our opera- tions. We publish an annual report on our corporate responsibility initiatives, which is available on our website. (For more, see page 13.) Building trust with our stakeholders is not only the right thing to do, it’s vital to the relationships we have with our partners and customers. That human dimension also shapes the way we lead and manage our people. Our strategy is only as good as the people who carry it out, our reputation only as strong as the employees who embody it for customers. We have taken a num- ber of steps to raise standards, increase our competitive focus and put more tools for decision-making in the hands of our employees. For example, we devoted more than 8 million hours of training and $110 million in tuition assistance in 2006 to equip our employees to deploy new technologies and address the needs of sophisti- cated clients. We also have a rigorous and comprehensive Code of Business Conduct that applies to all employees worldwide. We train and certify all employees in the 11,280 number of nonprofit organizations that received time/money from verizon volunteers last year 600,000 Hours of community service by verizon volunteers in 2006 3,300 nonprofit organizations that received grants directly from the verizon Foundation Verizon Thinkfinity at a glance: 47,000 Free online educational plans and other resources available to educators 90,200 schools using verizon thinkfinity resources 2,700,000 user sessions on thinkfinity web site each month in 2006 Verizon Wireless HopeLine at a glance: $1,300,000 verizon Wireless Hopeline grants in 2006 910,000 phones collected in 2006 by Hopeline to support domestic violence prevention programs 300 Domestic violence prevention organizations funded in 2006 2 verizon communications inc. 2006 annual report What We Do: Corporate Responsibility Verizon uses the power of networks to enrich people’s lives. We believe deeply in the ability of communications to empower, teach, entertain and connect. That’s why Verizon is committed to improving literacy in America and preparing students for success in the 21st century workplace. We also put our technologies to work by helping victims of domestic violence, improving the quality of health care in the U.S., and educating children and parents about online safety. In addition, Verizon employees have deep roots in their communities, and feel a responsibility to make a positive impact through volunteerism and charitable contributions. For more information on Verizon’s commitment to corporate responsibility, please visit our web site at www.verizon.com/responsibility. Verizon Thinkfinity Thinkfinity is the Verizon Foundation's leading-edge resource for educators and the literacy community. This online education platform, which contains more than 47,000 educational resources such as lesson plans and student activities, creates endless possibilities for learning. In partnership with eight of the nation's leading education organizations, Thinkfinity is commercial-free and accessible anytime from anywhere at no cost. The homepage can be found at www.thinkfinity.org. Verizon will continue to expand this treasure chest of ideas and is working to make it available on other technologies to support learning in the 21st century. What We Do: Business Transformation Verizon’s strategic investments and focus on new growth opportunities have transformed our company and strengthened our position in the growth segments of the communications, information and entertainment industry. These charts show Verizon’s improving revenue mix from 2004 to 2006. Revenues grew from $70.7 billion in 2004 to $88.1 billion in 2006. During this same period, wireless and global businesses became a much larger percentage of total revenues. This means we’re less dependent on the traditional telephone business and better positioned in the growth areas of broadband, wireless and global IP that are driving the world’s economy forward. Business Transformation Drives Revenue Growth 2004 $70.7 Billion 2006 $88.1 Billion Global Business Broadband and Video Wireless Wireless Consumer Voice Wholesale Global Business Broadband and Video Consumer Voice Other Wireline International and Information Services Other Wireline Wholesale Adjusted revenues in 2004 include those related to our former Information Services segment and our Caribbean and Latin American properties which are classified as discontinued operations, and excludes revenues related to MCI which was acquired on January 6, 2006. Business Transformation Drives Revenue Growth 2004 $70.7 Billion 2006 $88.1 Billion Wireless Wireless Global Business Broadband and Video Consumer Voice Wholesale Global Business Broadband and Video Consumer Voice Other Wireline International and Information Services Other Wireline Wholesale verizon communications inc. 2006 annual report code, and we have established standards of conduct for our suppliers to ensure that they conduct business in accordance with our standards of integrity and respect. We have seen some significant changes in our senior leadership team this year. Our vice chairman and longstanding technology guru, Larry Babbio, has decided to retire after more than 40 years in the communications industry. We will feel the influence of his passionate belief in superior networks as the basis of competitive advantage and value creation for years to come. In January, we created three new senior positions at the corporate level, naming Denny Strigl as president and chief operating officer, John Stratton as chief marketing officer, and Shaygan Kheradpir as chief information officer. Shareowners look to the board of directors to use good corporate governance in overseeing management’s performance and results. The board’s oversight focuses on three principal areas: strategy development and execution, risk management, and management development. Verizon’s board of directors has been instrumental in leading our company through a period of historic technological and competi- tive transformation, balancing long-term investment with rigorous performance standards that drive management to build shareowner value. Board members are active and vigorous advocates for shareowner interests, reviewing strategic plans and holding management accountable for the successful execution of annual oper- ating plans. Our full board met 12 times and there were a total of 21 committee meetings in 2006. Independent board members meet regularly in executive ses- sion and annually elect an independent director to serve as the presiding director and act as a liaison with the chairman. During the past year, the board elected two new directors – Fran Keeth and John Snow – who bring to us tremendous expertise in global operations and finance. Over the past three years, five new independent directors have been added to the board. We believe that our audit and finance committee, led by Thomas O’Brien, is one of the strongest in all of corporate America. Our corporate governance and policy committee, led by Sandra Moose, continues to develop rigorous corporate gover- nance standards that govern the board and its committees. Our human resources committee, led by Walter Shipley, has helped put in place a team of senior execu- tives with proven track records, a deep knowledge of technology and markets, and a demonstrated ability to lead us forward at critical junctures in our history. Creating an aligned, accountable company is the work of leaders. To achieve the superb execution we require across our big, diverse and complex company, Verizon leaders must act on a few simple rules. Verizon Core Values Respect Integrity Performance Excellence Accountability Our leaders are visible. They communicate goals, measure progress and reward results. They are required to meet challenges head-on and own their results. They are rewarded for creating value, not managing budgets. They rally their people around sales and service, and motivate them to come to work every day with a pas- sion to compete and win. They challenge, communicate, take down barriers and do the work. They intervene in the lives of their organizations to drive performance and help Verizon win. Our people understand the challenges ahead. The degree of complexity in the Internet marketplace continues to amaze, as does the intensity of the competition we face from a widening circle of companies. Keeping on top of these challenges will require us to be in a constant mode of learning, innovating, growing and transforming. Of all our accomplishments, what I’m most proud of is that we are a team with the confidence to change our company – and ourselves – to conform to the dynam- ics of the world around us. Every year, Verizon is a different company than we were the year before: more innovative, more global, more competitive and more high- tech. As we move forward, we are more focused on our core strategies and unified in how we approach our customers. And with each passing day, we believe even more deeply in the capabilities we bring to the marketplace and the vital role we play in delivering all the new experiences of the Web 2.0 world. We’re excited about creating a great future for our customers, employees and shareowners. We’re motivated by the possibilities of advanced communications technologies that are as transformational as any we have seen in the history of our industry. Most of all, we are guided by the values that have shaped our history and inspired by the legacy of technology leadership that has made us the company we are today. Serving customers with great networks is our heritage, our future and our daily challenge. It’s what we do. Ivan G. Seidenberg Chairman and Chief Executive Officer 6 Selected Financial Data Results of Operations Operating revenues Operating income Income before discontinued operations and cumulative effect of accounting change Per common share – basic Per common share – diluted Net income Net income available to common shareowners Per common share – basic Per common share – diluted Cash dividends declared per common share Financial Position Total assets Long-term debt Employee benefit obligations Minority interest Shareowners’ investment V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S 2006 2005 (dollars in millions, except per share amounts) 2002 2003 2004 $ 88,144 13,373 $ 69,518 12,581 $ 65,751 10,870 $ 61,754 5,312 $ 60,907 12,386 5,480 1.88 1.88 6,197 6,197 2.13 2.12 1.62 6,027 2.18 2.16 7,397 7,397 2.67 2.65 1.62 5,899 2.13 2.11 7,831 7,831 2.83 2.79 1.54 2,168 .79 .79 3,077 3,077 1.12 1.12 1.54 3,016 1.11 1.11 4,079 4,079 1.49 1.49 1.54 $188,804 28,646 30,779 28,337 48,535 $168,130 31,569 17,693 26,433 39,680 $165,958 34,970 16,796 24,709 37,560 $165,968 38,609 15,726 24,023 33,466 $167,468 43,066 14,484 23,749 32,616 • Significant events affecting our historical earnings trends in 2004 through 2006 are described in Management’s Discussion and Analysis of Results of Operations and Financial Condition. • 2003 data includes severance, pension and benefit charges and other special and/or non-recurring items. • 2002 data includes gains on investments and sales of businesses and other special and/or non-recurring items. Stock Performance Graph Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecom Services Index and S&P 500 Stock Index s r a l l o D $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 2001 2002 2003 2004 2005 2006 Verizon S&P 500 S&P 500 Telecom Services At December 31, Data Points in Dollars* Verizon S&P 500 S&P 500 Telecom Services 2001 100.0 100.0 100.0 2002 84.9 77.9 65.9 2003 80.3 100.2 70.7 2004 96.5 111.1 84.7 2005 75.2 116.6 80.2 2006 101.1 135.0 109.5 * Assumes $100 invested on December 31, 2001 The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period. It assumes $100 was invested on December 31, 2001, with dividends reinvested. 17 Management’s Discussion and Analysis of Results of Operations and Financial Condition V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S OVERVIEW Verizon Communications Inc. (Verizon) is one of the world’s leading providers of communications services. Verizon’s wireline business, which includes the operations of the former MCI, provides telephone services, including voice, broadband data and video services, net- work access, nationwide long-distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. Verizon’s domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and services across the United States using one of the most extensive and reliable wireless networks. Stressing diversity and commitment to the communities in which we operate, Verizon has a highly diverse workforce of approx- imately 242,000 employees. The sections that follow provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and include discussions of our results of opera- tions, financial position and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practi- cable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources. We also monitor several key economic indicators as well as the state of the economy in general, primarily in the United States where the majority of our operations are located, in evaluating our operating results and ana- lyzing and understanding business trends. While most key economic indicators, including gross domestic product, impact our operations to some degree, we have noted higher correlations to housing starts, non-farm employment, personal consumption expenditures and cap- ital spending, as well as more general economic indicators such as inflation and unemployment rates. Our results of operations, financial position and sources and uses of cash in the current and future periods reflect Verizon management’s focus on the following four key areas: • Revenue Growth – Our emphasis is on revenue growth, devoting more resources to higher growth markets such as wireless, including wireless data, wireline broadband connections, including fiber optics to the premises (Verizon’s FiOS data and TV services), digital subscriber lines (DSL) and other data services, long distance, as well as expanded strategic services to business markets, rather than to the traditional wireline voice market, where we have been experiencing access line losses. Verizon reported consolidated revenue growth of 26.8% in 2006 com- pared to 2005, primarily driven by the merger with MCI and 17.8% higher revenue at Domestic Wireless. Verizon added 7,715,000 wireless customers and 1,838,000 broadband connec- tions in 2006. • Operational Efficiency – While focusing resources on growth, we are continually challenging our management team to lower expenses, particularly through technology-assisted productivity improvements including self-service initiatives. The effect of these and other efforts, such as real estate consolidations, call center routing improvements and the formation of Verizon Services Organization, has been to change the company’s cost structure and maintain stable operating income margins. Real estate consolidations include the establishment of the Verizon Center. The Verizon Services Organization provides centralized services across our business, including procurement, finance operations and real estate services. With our deployment of the 18 FiOS network, we expect to realize savings in annual, ongoing operating expenses as a result of efficiencies gained from fiber network facilities. As the deployment of the FiOS network gains scale and installation automation improvements occur, costs per home connected are expected to decline. Since the merger with MCI, we have gained operational benefits from sales force and product and systems integration initiatives. While workforce levels in 2006 increased to 242,000 from 206,000 primarily as a result of the acquisition of MCI, productivity improvements and merger synergy savings led to headcount reductions of about 9,200 in our wireline business. • Capital Allocation – Our capital spending continues to be directed toward growth markets. High-speed wireless data (Evolution- Data Optimized, or EV-DO) services, replacement of copper access lines with fiber optics to the premises, as well as expanded services to business markets are examples of areas of capital spending in support of these growth markets. Excluding discontinued operations, in 2006, capital expenditures were $17,101 million compared to 2005 capital expenditures of $14,964 million. Of the increase, $1,602 million was primarily attributable to capital spending related to the former MCI, with the remainder in support of growth initiatives. In 2007, Verizon management expects capital expenditures to be in the range of $17.5 billion to $17.9 billion. In addition to capital expenditures, Verizon Wireless continues to participate in the Federal Communications Commission’s (FCC) wireless spectrum auc- tions and continues to evaluate spectrum acquisitions in support of expanding data applications and its growing customer base. In 2006, this included participation in the FCC Auction 66 of Advanced Wireless Services spectrum (AWS auction) in which Verizon Wireless was the high bidder on thirteen 20 MHz licenses covering a population of nearly 200 million. • Cash Flow Generation and Shareowner Value Creation – The financial statements reflect the emphasis of management on not only directing resources to growth markets, but also creating value for shareowners through the use of cash provided by our operating and investing activities for the repayment of debt, share repurchases and providing a stable dividend to our shareowners, in addition to returning value to shareowners through spin-off and other strategic transactions. Verizon’s total debt decreased to $36,361 million as of December 31, 2006 from $38,257 million as of December 31, 2005, primarily as a result of the debt reduction resulting from the spin-off of Idearc Inc. (Idearc), formerly our U.S. print and Internet yellow pages directories business, and the use of cash acquired in the MCI merger and generated through strategic asset sales (see “Other Factors That May Affect Future Results – Recent Developments”), partially offset by debt acquired in connection with the MCI merger. Strategic asset sales included the sale of Verizon Dominicana C. por A. (Verizon Dominicana), which closed on December 1, 2006. Verizon’s ratio of debt to debt combined with shareowners’ equity was 42.8% as of December 31, 2006 compared with 49.1% as of December 31, 2005. Management has recommended to the Board of Directors that our dividend be maintained at a level no less than that imme- diately preceding the Idearc spin-off. In addition, we repurchased $1,700 million of our common stock as part of our previously announced program during 2006, and we plan to continue our share buyback program at similar levels in 2007. Additionally, Verizon’s balance of cash and cash equivalents at December 31, 2006 of $3,219 million increased by $2,459 million from $760 mil- lion at December 31, 2005. Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Supporting these key focus areas are continuing initiatives to enhance the value of our products and services through well-man- aged deployment of proven advanced technology and through competitive products and services packaging. At Wireline, as of December 31, 2006, we met our goal of passing six million premises with our high-capacity fiber network (FiOS), doubling the number of premises passed compared to year-end 2005. We added 517,000 new FiOS data connections in 2006. In 2005, Verizon began offering video on the FiOS network in three markets. By the end of 2006, Verizon had obtained over 600 video franchises covering 7.3 million households with service available for sale to 2.4 million premises. We had 207,000 FiOS TV customers by the end of 2006. We are also developing and marketing innovative product bundles to include local wireline, long distance, wireless and broadband services for consumer and general business retail customers. These efforts will also help counter the effects of competition and technology substi- tution that have resulted in access line losses, and will enable us to grow revenues by becoming a leading video provider. Also at Wireline, we will continue to focus investments in strategic areas by rolling-out next generation global IP networks to meet the ongoing global enterprise market shift to IP-based products and services. Deployment of new strategic service offerings, including expansion of our voice over IP (VoIP) and international Ethernet capabilities, introduction of cutting edge video and web-based con- ferencing capabilities and enhancements to our virtual private network portfolio, will allow us to continue to gain share in the enter- prise market. Additionally, we will continue to integrate the business of the former MCI to drive continued growth in synergy, supporting a focus on operational efficiency and continued creation of share- owner value. At Verizon Wireless, we will continue to execute on the fundamentals of our network superiority and value proposition to deliver growth for the business and provide new and innovative products and services for our customers such as Broadband Access, our EV-DO service. To accomplish our goal of being the acknowledged market leader in providing wireless voice and data communication services in the U.S., we will continue to implement the following key elements of our business strategy: provide the highest network reliability through our code division multiple access (CDMA) 1XRTT technology and EV-DO (Revision A) infrastructure, which significantly increases data transmission rates; profitably acquire, satisfy and retain our cus- tomers; and increase the value of our service offerings to customers while achieving revenue and net income growth. We also continue to expand our wireless data, messaging and multi-media offerings for both consumer and business customers and take advantage of the growing demand for wireless data services and focus on operating margins and capital efficiency by driving down costs and leveraging our scale. In January 2007, Verizon announced a definitive agreement with FairPoint Communications, Inc. (FairPoint) that will result in Verizon establishing a separate entity for its local exchange access lines and related business assets in Maine, New Hampshire and Vermont, spinning off that new entity to Verizon’s shareowners, and immedi- ately merging it with and into FairPoint. The total value to be received by Verizon and its shareowners in exchange for these oper- ations will be approximately $2,715 million. CONSOLIDATED RESULTS OF OPERATIONS to sell our In this section, we discuss our overall results of operations and high- light special and non-recurring items. As a result of the spin-off of our U.S. print and Internet yellow pages directories business, which was included in the Information Services segment, as well as reaching definitive agreements in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) and Verizon Dominicana, each of which was included in the International seg- ment, the operations of our former U.S. print and Internet yellow pages directories business, Verizon Dominicana and TELPRI are reported as discontinued operations and assets held for sale. Accordingly, we now have two reportable segments – Wireline and Domestic Wireless. Prior period amounts and discussions are revised to reflect this change. We include in our results of operations the results of the former MCI business subsequent to the close of the merger on January 6, 2006. interests This section on consolidated results of operations carries forward the segment results, which exclude the special and non-recurring items, and highlights and describes those items separately to ensure consistency of presentation in this section and the “Segment Results of Operations” section. In the following section, we review the performance of our two reportable segments. We exclude the effects of the special and non-recurring items from the segments’ results of operations since management does not consider them in assessing segment performance, due primarily to their non-recurring and/or non-operational nature. We believe that this presentation will assist readers in better understanding our results of operations and trends from period to period. 19 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Consolidated Revenues Years Ended December 31, 2006 2005 % Change 2005 (dollars in millions) % Change 2004 Wireline Verizon Telecom Verizon Business Intrasegment eliminations Domestic Wireless Corporate & Other Revenues of Hawaii operations sold Consolidated Revenues $ 33,259 20,490 (2,955) 50,794 38,043 (693) – $ 88,144 $ 32,114 7,394 (1,892) 37,616 32,301 (579) 180 $ 69,518 35.0% 17.8 19.7 (100.0) 26.8 $ 32,114 7,394 (1,892) 37,616 32,301 (579) 180 $ 69,518 $ 32,261 7,414 (1,654) 38,021 27,662 (461) 529 $ 65,751 (1.1)% 16.8 25.6 (66.0) 5.7 2006 Compared to 2005 Consolidated revenues in 2006 were higher by $18,626 million, or 26.8% compared to 2005 revenues. This increase was primarily the result of significantly higher revenues at Wireline and Domestic Wireless. Wireline’s revenues in 2006 increased by $13,178 million, or 35.0% compared to 2005 due to the acquisition of MCI and growth from broadband and long distance services. We added 1.8 million new broadband connections, for a total of 7.0 million lines in service at December 31, 2006, an increase of 35.7% compared to 5.1 million lines in service at December 31, 2005. The number of Freedom service plans continue to stimulate growth in long distance services, as the number of packages reached 7.9 million as of December 31, 2006, representing a 44.1% increase from December 31, 2005. These increases were partially offset by declines in wholesale rev- enues at Verizon Telecom due to subscriber losses resulting from technology substitution, including wireless and VoIP. Wholesale rev- enues at Verizon Telecom declined by $752 million, or 8.3% in 2006 compared to similar periods in 2005 primarily due to the exclusion of affiliated access revenues billed to the former MCI mass market enti- ties in 2006. Revenues at Verizon Business increased primarily due to the acquisition of MCI. Domestic Wireless’s revenues increased by $5,742 million, or 17.8% compared to 2005 due to increases in service revenues, including data revenues, and equipment and other revenues. Data revenues increased by $2,232 million or 99.5% compared to 2005. Domestic Wireless ended 2006 with 59.1 million customers, an increase of 15.0% over 2005. Domestic Wireless’s retail customer base as of December 31, 2006 was approximately 56.8 million, a 15.9% increase over December 31, 2005, and comprised approximately 96.1% of our total customer base. Average service revenue per cus- tomer (ARPU) increased by 0.6% to $49.80 in 2006 compared to 2005, primarily attributable to increases in data revenue per cus- tomer driven by increased use of our messaging and other data services. Retail ARPU increased by 0.7% to $50.44 for 2006 com- pared to 2005. Increases in wireless devices sold and revenue per unit sold drove increases in equipment and other revenue in 2006 compared to 2005. Lower revenue of Hawaii operations sold of $180 million, or 100% in 2006 compared to 2005 was the result of their sale during the second quarter of 2005. 2005 Compared to 2004 Consolidated revenues in 2005 were higher by $3,767 million, or 5.7% compared to 2004 revenues. This increase was primarily the result of significantly higher revenues at Domestic Wireless, partially offset by lower revenues at Wireline and the sale of our Hawaii wire- line operations in the second quarter of 2005. Wireline’s revenues in 2005 were lower than 2004 by $405 million, or 1.1% primarily due to lower revenues from local services, partially offset by higher network access and long distance services rev- enues. We added 1.7 million new broadband connections, for a total of 5.1 million lines in service at December 31, 2005, an increase of 47.6% compared to 3.5 million lines in service at December 31, 2004. The introduction of our Freedom service plans stimulated growth in long distance services. As of December 31, 2005, approx- imately 53% of our local wireline customers chose Verizon as their long distance carrier. These increases were offset by declines in wholesale revenues at Verizon Telecom due to subscriber losses resulting from technology substitution, including wireless and VoIP. Domestic Wireless’s revenues increased by $4,639 million, or 16.8% in 2005 compared to 2004 due to increases in service revenues, including data revenues, and equipment and other revenues. Data revenues increased by $1,127 million or 101.0% compared to 2004. Domestic Wireless ended 2005 with 51.3 million customers, an increase of 17.2% over 2004. Domestic Wireless’s retail customer base as of December 31, 2005 was approximately 49.0 million, a 17.2% increase over December 31, 2004, and comprised approxi- mately 95.5% of our total customer base. ARPU decreased 1.5% to $49.49 in 2005 compared to 2004, primarily due to pricing changes in early 2005, partially offset by a 71.7% increase in data revenue per customer in 2005 compared to 2004, driven by increased use of our messaging and other data services. Increases in wireless devices sold and revenue per unit sold drove increases in equipment and other revenue in 2005 compared to 2004. Lower revenue of Hawaii operations sold of $349 million, or 66.0% in 2005 compared to 2004 was the result of the sale during the second quarter of 2005 of our wireline and directory operations in Hawaii. 20 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Consolidated Operating Expenses Years Ended December 31, 2006 2005 % Change 2005 (dollars in millions) % Change 2004 Cost of services and sales Selling, general and administrative expense Depreciation and amortization expense Sales of businesses, net Consolidated Operating Expenses $ 34,994 25,232 14,545 – $ 74,771 $ 24,200 19,652 13,615 (530) $ 56,937 44.6% 28.4 6.8 (100.0) 31.3 $ 24,200 19,652 13,615 (530) $ 56,937 $ 22,032 19,346 13,503 – $ 54,881 9.8% 1.6 0.8 nm 3.7 nm – Not meaningful 2006 Compared to 2005 Cost of Services and Sales Cost of services and sales increased by $10,794 million, or 44.6% in 2006 compared to 2005. This increase was driven by the inclusion of the former MCI operations, higher wireless network costs, increases in wireless equipment costs and increases in pension and other postretirement benefit costs, partially offset by the net impact of productivity improvement initiatives. The higher wireless network costs were caused by increased network usage relating to both voice and data services in 2006 compared to 2005, partially offset by decreased roaming, local interconnection and long distance rates. Cost of wireless equipment sales increased in 2006 compared to 2005 primarily as a result of an increase in wire- less devices sold due to an increase in gross activations and equipment upgrades, together with an increase in cost per unit. Costs in these periods were also impacted by increased pension and other postretirement benefit costs. The overall impact of the 2006 assumptions, combined with the impact of lower than expected actual asset returns over the past several years, resulted in pension and other postretirement benefit expense of approximately $1,377 million in 2006 compared to net pension and postretirement benefit expense of $1,231 million in 2005. Special and non-recurring items recorded during 2006 included $25 million of merger integration costs. Selling, General and Administrative Expense Selling, general and administrative expense includes salaries and wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income, advertising and sales commission costs, customer billing, call center and informa- tion technology costs, professional service fees and rent for administrative space. Selling, general and administrative expense increased by $5,580 mil- lion, or 28.4% in 2006 compared to 2005. This increase was driven by the inclusion of the former MCI operations, increases in the Domestic Wireless segment primarily related to increased salary and benefits expenses, and special and non-recurring charges. Special and non-recurring items in selling, general and administrative expenses in 2006 were $816 million compared to special and non- recurring items in 2005 of $311 million. Special and non-recurring items in 2006 included $56 million related to pension settlement losses incurred in connection with our benefit plans, a net pretax charge of $369 million for employee severance and severance-related activities in connection with the involuntary separation of approximately 4,100 employees, who were separated in 2006. Special and non-recurring charges in 2006 also included $207 million of merger integration costs, primarily for advertising and other costs related to re-branding initiatives and systems integration activ- ities, and a net pretax charge of $184 million for Verizon Center relocation costs. Special and non-recurring items in 2005 included a pretax impairment charge of $125 million pertaining to our leasing operations for aircraft leased to airlines experiencing financial difficul- ties, a net pretax charge of $98 million related to the restructuring of the Verizon management retirement benefit plans and a pretax charge of $59 million associated with employee severance costs and sever- ance-related activities in connection with the voluntary separation program for surplus union-represented employees. Depreciation and Amortization Expense Depreciation and amortization expense increased by $930 million, or 6.8% in 2006 compared to 2005. This increase was primarily due to higher depreciable and amortizable asset bases as a result of the MCI merger and, to a lesser extent, increased capital expenditures. 2005 Compared to 2004 Cost of Services and Sales Cost of services and sales increased by $2,168 million, or 9.8% in 2005 compared to 2004. This increase was principally due to increases in pension and other postretirement benefit costs, higher direct wireless network costs, increases in wireless equipment costs and higher costs associated with our wireline growth businesses. The overall impact of pension and other postretirement benefit plan assumption changes, combined with lower asset returns over the last several years, increased net pension and postretirement benefit expenses by $407 million in 2005 (primarily in cost of services and sales) compared to 2004. Higher direct wireless network charges resulted from increased network usage in 2005 compared to 2004, partially offset by lower roaming, local interconnection and long dis- tance rates. Cost of equipment sales was higher in 2005 due primarily to an increase in wireless devices sold together with an increase in cost per unit sold, driven by growth in customer addi- tions and an increase in equipment upgrades in 2005. Higher costs associated with our wireline growth businesses, long distance and broadband connections, included a 2,400, or 1.7% increase in the number of Wireline employees as of December 31, 2005 compared to December 31, 2004. Costs in 2004 were impacted by lower inter- connection expense charged by competitive local exchange carriers (CLECs) and settlements with carriers, including the MCI settlement recorded in 2004. Selling, General and Administrative Expense Selling, general and administrative expense increased by $306 million, or 1.6% in 2005 compared to 2004. This increase was driven by increases in salary, pension and benefits costs, including an increase in the customer care and sales channel work force and sales commis- sions, partially offset by gains on real estate sales in 2005 and lower 21 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued bad debt costs. Special and non-recurring items in selling, general and administrative expenses in 2005 were $311 million compared to special and non-recurring items in 2004 of $971 million. Special and non-recurring items in 2005 included a pretax impair- ment charge of $125 million pertaining to our leasing operations for aircraft leased to airlines experiencing financial difficulties, a net pretax charge of $98 million related to the restructuring of the Verizon management retirement benefit plans and a pretax charge of $59 million associated with employee severance costs and sever- ance-related activities in connection with the voluntary separation program to surplus union-represented employees. Special and non- recurring items recorded in 2004 included $805 million related to pension settlement losses incurred in connection with the voluntary separation of approximately 21,000 employees in the fourth quarter of 2003 who received lump-sum distributions during 2004. Special charges in 2004 also include an expense credit of $204 million resulting from the favorable resolution of pre-bankruptcy amounts due from MCI, partially offset by a charge of $113 million related to operating asset losses. Depreciation and Amortization Expense Depreciation and amortization expense increased by $112 million, or 0.8% in 2005 compared to 2004. This increase was primarily due to the increase in depreciable assets and software, partially offset by lower rates of depreciation on telephone plant. Sales of Businesses, Net During the second quarter of 2005, we sold our wireline and directory businesses in Hawaii and recorded a net pretax gain of $530 million. Pension and Other Postretirement Benefits For 2006 pension and other postretirement benefit costs, the dis- count rate assumption remained at 5.75%, consistent with interest rate levels at the end of 2005. The expected rate of return on pen- sion plan assets remained 8.50%, while the expected rate of return on postretirement benefit plan assets was increased to 8.25% from 7.75% in 2005. The medical cost trend rate was 10% for 2006. For 2005 pension and other postretirement benefit costs, the discount rate assumption was lowered to 5.75% from 6.25% in 2004, consis- tent with interest rate levels at the end of 2004. The medical cost trend rate assumption was 10% in 2005. The expected rate of return on pension and postretirement benefit plan assets for 2004 was maintained at 8.50%. For 2007 pension and other postretirement benefit costs, we evalu- ated our key employee benefit plan assumptions in response to current conditions in the securities markets and medical and pre- scription drug cost trends. The discount rate assumption will be increased to 6.00%, consistent with interest rate levels at the end of 2006. The medical cost trend rate will be 10% for 2007. The expected rate of return on pension plan assets will remain at 8.50% and the expected rate of return on postretirement benefit plan assets will remain at 8.25% in 2007. During 2006, we recorded net pension and postretirement benefit expense of $1,377 million compared to net pension and postretire- ment benefit expense of $1,231 million in 2005 and net pension and postretirement benefit expense of $824 million in 2004. 22 Other Consolidated Results Equity in Earnings of Unconsolidated Businesses Equity in earnings of unconsolidated businesses increased by $87 million, or 12.7% in 2006 compared to 2005. The increase is primarily due to additional pension liabilities that Campañia Anónima Nacional Teléfonos de Venezuela (CANTV) recognized in 2005, as well as the effect of favorable operating results and lower taxes in 2006. In addi- tion, the increase reflects our proportionate share, or $85 million, of a tax benefit at Vodafone Omnitel N.V. (Vodafone Omnitel) in the third quarter of 2006. A similar benefit was recorded in the third quarter of 2005 of $76 million. Equity in earnings of unconsolidated businesses decreased by $1,004 million, or 59.4% in 2005 compared to 2004. The decrease is primarily due to a pretax gain of $787 million recorded on the sale of our 20.5% interest in TELUS Corporation (TELUS) in the fourth quarter of 2004 and the sale of another investment in 2004, lower equity income resulting from the sale of TELUS and estimated addi- tional pension liabilities at CANTV, partially offset by higher tax benefits and operational results at Vodafone Omnitel. Other Income and (Expense), Net Years Ended December 31, 2006 (dollars in millions) 2004 2005 Interest income Foreign exchange gains (losses), net Other, net Total $ $ 201 $ (3) 197 395 $ 103 $ 11 197 311 $ 97 (7) (8) 82 Other Income and (Expense), Net in 2006 increased $84 million, or 27% compared to 2005. The increase was primarily due to increased interest income as a result of higher average cash balances coupled with higher interest rates in 2006 compared to 2005, partially offset by foreign exchange losses. Other, net in 2006 includes pretax gains on sales of investments and marketable securities, as well as leased asset gains. Other, net in 2005 includes a pretax gain on the sale of a small inter- national business and investment gains. Other Income and (Expense), Net in 2005 and 2004 include expenses of $14 million and $55 million, respectively, related to the early retirement of debt. Interest Expense Years Ended December 31, 2006 (dollars in millions) 2004 2005 Interest expense Capitalized interest costs Total interest costs on debt balances Weighted average debt outstanding Effective interest rate $ 2,349 $ 2,129 $ 2,336 177 $ 2,811 $ 2,481 $ 2,513 352 462 $ 41,500 $ 39,152 $ 41,781 6.0% 6.3% 6.8% In 2006, interest costs increased $330 million compared to 2005 pri- marily due to an increase in average debt level of $2,348 million and increased interest rates compared to 2005. Higher capital expendi- tures in 2006 contributed to higher capitalized interest costs. In 2005, the decrease in interest costs was primarily due to a reduc- tion in average debt level of $2,629 million compared to 2004, partially offset by higher average interest rates. Higher capital expen- ditures in 2005 contributed to higher capitalized interest costs. Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Minority Interest Years Ended December 31, 2006 (dollars in millions) 2004 2005 Minority interest $ 4,038 $ 3,001 $ 2,329 The increase in minority interest expense in 2006 compared to 2005, and in 2005 compared to 2004 was attributable to higher earnings at Domestic Wireless, which is 45% owned by Vodafone Group Plc (Vodafone). Provision for Income Taxes Years Ended December 31, Provision for income taxes Effective income tax rate 2006 (dollars in millions) 2004 2005 $ 2,674 $ 2,421 $ 2,078 26.1% 28.7% 32.8% The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before the provi- sion for income taxes. Our effective income tax rate in 2006 was higher than 2005 primarily as a result of favorable tax settlements and the recognition of capital loss carryforwards in 2005. These increases were partially offset by tax benefits from foreign opera- tions and lower state taxes in 2006 compared to 2005. Our effective income tax rate in 2005 was higher than 2004 due to taxes on overseas earnings repatriated during the year, lower for- eign-related tax benefits and lower favorable deferred tax reconciliation adjustments. Included in the provision of income taxes in 2005 are capital gains realized in connection with the sale of our Hawaii business, which resulted in the realization of tax benefits of $336 million primarily related to capital loss carryforwards. This was largely offset by a tax provision of $206 million related to the repatri- ation of foreign earnings under the provisions of the American Jobs Creation Act of 2004. The effective income tax rate in 2004 was favorably impacted by the reversal of a valuation allowance relating to investments, tax benefits related to deferred tax balance adjust- ments and expense credits that are not taxable. A reconciliation of the statutory federal income tax rate to the effec- tive rate for each period is included in Note 16 to the consolidated financial statements. Discontinued Operations Discontinued operations represents the results of operations of TELPRI for all years presented in the consolidated statements of income and Verizon Dominicana, Verizon Information Services and Verizon Information Services Canada Inc. prior to their sale or spin- off in December 2006, November 2006 and the fourth quarter of 2004, respectively. In the second quarter of 2006, we announced our decision to sell Verizon Dominicana and TELPRI and, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144) we have classified the results of operations of Verizon Dominicana and TELPRI as discontinued operations. The sale of Dominicana closed in December 2006 and, primarily due to taxes on previously unremitted earnings, a pretax gain of $30 million resulted in an after- tax loss of $541 million (or $.18 per diluted share). We completed the spin-off of Idearc to our shareholders on November 17, 2006, which resulted in an $8,695 million increase to contributed capital in shareowners’ investment. Discontinued operations also include the results of operations of Verizon Information Services Canada Inc. prior to its sale in the fourth quarter of 2004. The sale resulted in a pretax gain of $1,017 million ($516 million after-tax, or $.18 per diluted share). Income from discontinued operations, net of tax decreased by $611 million, or 44.6% in 2006 compared to 2005. This decrease was pri- marily due to the after-tax loss recorded in 2006 on the sale of Verizon Dominicana, partially offset by cessation of depreciation on fixed assets held for sale. Income from discontinued operations, net of tax decreased by $562 million, or 29.1% in 2005 compared to 2004. The decrease was primarily driven by the after-tax gain recorded on the sale of Verizon Information Services Canada Inc. in 2004. Cumulative Effect of Accounting Change In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment, (SFAS No. 123(R)) which revises SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) requires all share- based payments to employees, including grants of employee stock options, to be recognized as compensation expense based on their fair value. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, using the prospective method (as permitted under SFAS No. 148, Accounting for Stock- Based Compensation – Transition and Disclosure (SFAS No. 148)) for all new awards granted, modified or settled after January 1, 2003. Under the prospective method, employee compensation expense in the first year is recognized for new awards granted, modified, or set- tled. The options generally vest over a term of three years, therefore, the expenses related to stock-based employee compensation included in the determination of net income for 2006, 2005 and 2004 are less than what would have been recorded if the fair value method had been applied to previously issued awards. Effective January 1, 2006, we adopted SFAS No. 123(R) utilizing the modified prospective method. SFAS No. 123(R) requires the meas- urement of stock-based compensation expense based on the fair value of the award on the date of grant. Under the modified prospec- tive method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. SFAS No. 123(R) is supplemented by Staff Accounting Bulletin (SAB) No. 107, “Share- Based Payments” (SAB No. 107). This SAB, which was issued by the Securities and Exchange Commission (SEC) in March 2005, expresses the views of the SEC staff regarding the relationship between SFAS No. 123(R) and certain SEC rules and regulations. In particular, this SAB provides guidance related to valuation methods, the classification of compensation expense, non-GAAP financial measures, the accounting for income tax effects of share-based payment arrangements, disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS No. 123(R), and inter- pretations of other share-based payment arrangements. We also adopted SAB No. 107 on January 1, 2006. We recorded a $42 million cumulative effect of accounting change as of January 1, 2006, net of taxes and after minority interest, to rec- ognize the effect of initially measuring the outstanding liability awards (VARs) of the Verizon Wireless joint venture at fair value uti- lizing a Black-Scholes model. We do not expect SFAS No. 123(R) to have a material effect on our consolidated financial statements in future periods. 23 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued SEGMENT RESULTS OF OPERATIONS On November 17, 2006, we completed the spin-off to our shareowners of our U.S. print and Internet yellow pages directories, which was included in the Information Services segment. The spin-off resulted in a new company, named Idearc Inc. In addition, on April 2, 2006, we reached definitive agreements to sell our interests in TELPRI and Verizon Dominicana, each of which was included in the International segment. In accordance with SFAS No. 144, we have classified the results of operations for our U.S. print and Internet yellow pages direc- tories business, Verizon Dominicana and TELPRI as discontinued operations and assets held for sale. Accordingly, we now have two reportable segments and prior period amounts and discussions are revised to reflect this change. Our segments are Wireline and Domestic Wireless. You can find additional information about our segments in Note 17 to the consolidated financial statements. We measure and evaluate our reportable segments based on segment income. Corporate, eliminations and other includes unallocated cor- porate expenses, intersegment eliminations recorded in consolidation, the results of other businesses such as our investments in unconsoli- dated businesses, primarily Omnitel and CANTV, lease financing, and asset impairments and expenses that are not allocated in assessing segment performance due to their non-recurring nature. These adjust- ments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their non-recurring and/or non-operational nature. Although such transac- tions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating decision makers’ assessment of unit performance. Wireline The Wireline segment, which includes the operations of the former MCI, consists of the operations of Verizon Telecom, a provider of telephone services, including voice, broadband video and data, net- work access, long distance, and other services to consumer and small business customers and carriers, and Verizon Business, a provider of next-generation IP network services globally to medium and large businesses and government customers. As discussed ear- lier under “Consolidated Results of Operations,” in the second quarter of 2005, we sold wireline properties in Hawaii representing approximately 700,000 access lines or 1% of the total Verizon Telecom switched access lines in service. For comparability pur- poses, the results of operations shown in the tables below exclude the Hawaii properties that have been sold. Operating Revenues Years Ended December 31, 2006 (dollars in millions) 2004 2005 Verizon Telecom Mass Markets Wholesale Other Verizon Business Enterprise Business Wholesale International and Other Intrasegment Eliminations Total Wireline Operating Revenues 24 $ 22,528 $ 20,446 $ 20,447 9,128 2,686 9,075 2,593 8,323 2,408 13,999 3,381 3,110 (2,955) 6,196 1,218 – (1,654) $ 50,794 $ 37,616 $ 38,021 6,018 1,376 – (1,892) In connection with the completion of the MCI merger, our product lines were realigned to be reflective of the Line of Business structure in which the product lines are currently being managed. Prior period amounts and discussions were reclassified to conform to the current presentation. Verizon Telecom Mass Markets Verizon Telecom’s Mass Markets revenue includes local exchange (basic service and end-user access), value-added services, long dis- tance, broadband services for residential and certain small business accounts and FiOS TV services. Value-added services are a family of services that expand the utilization of the network, including products such as Caller ID, Call Waiting, Home Voicemail and Return Call. Long distance includes both regional toll services and long distance services. Broadband services include DSL and FiOS. Our Mass Market revenues increased by $2,082 million, or 10.2% in 2006, and decreased by $1 million, or 0.0% in 2005. The increase in 2006 was principally due to the inclusion of revenues from the former MCI and, in 2006 and 2005, growth from broadband and long distance. In both years revenue increases were offset by lower demand and usage of our basic local exchange and accompanying services attributable to subscriber losses due to technology substi- tution, including wireless and VoIP. We added 1,838,000 new broadband connections, including 517,000 for FiOS in 2006, for a total of 6,982,000 lines at December 31, 2006, an increase of 35.7% compared to 5,144,000 lines in service at December 31, 2005. We have achieved a FiOS data pen- etration rate of 14% across all markets where we have been selling this service. Our Freedom service plans continue to stimulate growth in long distance services, as the number of plans reached 7.9 million as of December 31, 2006, representing a 44.1% increase from December 31, 2005. As of December 31, 2006, approximately 58% of our legacy Verizon wireline customers have chosen Verizon as their long distance carrier. Declines in switched access lines in service of 7.6% in 2006 and 6.7% in 2005 were mainly driven by the effects of competition and tech- nology substitution. Demand for legacy Verizon residential access lines declined 7.1% in 2006 and 6.3% in 2005, as customers substi- tuted wireless, broadband and cable services for traditional landline services. At the same time, legacy Verizon business access lines declined 3.2% in 2006, and 4.2% in 2005, primarily reflecting compe- tition and a shift to high-speed, high-volume special access lines. We continue to seek opportunities to retain and win back customers. Our Freedom service plans offer local services with various combi- nations of long distance and Internet access services in a discounted bundle available on one bill. We have introduced our Freedom service plans in nearly all of our key markets. Wholesale Wholesale revenues are earned from long distance and other com- peting carriers who use our local exchange facilities to provide usage services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues originate from carriers that buy dedicated local exchange capacity to support their private networks. Wholesale services also include local wholesale revenues from unbundled network elements (UNEs), interconnection revenues from CLECs and wireless carriers, and some data trans- port revenues. Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Wholesale revenues decreased by $752 million, or 8.3% in 2006 and by $53 million, or 0.6% in 2005, due to the exclusion, in 2006, of affiliated access revenues billed to the former MCI mass market entities, and, in 2006 and 2005, to declines in legacy Verizon switched access revenues and local wholesale revenues, offset by increases in special access revenues. Switched minutes of use declined in 2006 and 2005, reflecting the impact of access line loss and technology substitution. Wholesale lines decreased by 17.1% in 2006 due to the impact of a decision by a major competitor to deemphasize their local market initiatives in 2005. Special access revenue growth reflects continuing demand in the busi- ness market for high-capacity, high-speed digital services, partially offset by lessening demand for older, low-speed data products and services. As of December 31, 2006, customer demand for high capacity and digital data services increased 8.9% compared to 2005. The FCC regulates the rates that we charge customers for interstate access services. See “Other Factors That May Affect Future Results – Regulatory and Competitive Trends – FCC Regulation” for addi- tional information on FCC rulemaking concerning federal access rates, universal service and certain broadband services. Other Other revenues include services such as operator services (including deaf relay services), public (coin) telephone, card services and supply sales, as well as former MCI dial-around services including 10-10- 987, 10-10-220, 1-800-COLLECT and Prepaid Cards. Verizon Telecom’s revenues from other services decreased by $185 million, or 7.1% in 2006, and by $93 million, or 3.5% in 2005. These revenue decreases were mainly due to the discontinuation of non- strategic businesses, including the termination of a large commercial inventory management contract in 2005, and reduced business vol- umes, which were partially offset by the inclusion of revenues from the former MCI in 2006. Verizon Business Enterprise Business Our Enterprise Business market provides voice, data and internet communications services to medium and large business customers, multi-national corporations, and state and federal government cus- tomers. In addition, the Enterprise Business market also provides value-added services that make communications more secure, reli- able and efficient managed network services for customers that outsource all or portions of their communications and information processing operations. Traditional local and long distance services comprise $6,551 million, or 47% of revenue in 2006, $4,110 million, or 68% of revenue in 2005, and $4,447 million, or 72% of total Enterprise Business revenue in 2004. Enterprise Business also pro- vides data services such as Private Line, Frame Relay and ATM services, both domestically and internationally, as well as managed network services to its customers. Enterprise Business 2006 revenues of $13,999 million, increased $7,981 million, or 132.6% compared to 2005 primarily due to the acquisition of MCI, and declined $178 million, or 2.9% in 2005 com- pared to 2004. Data services revenue was $5,430, or 39% of Enterprise Business’ revenue stream in 2006, $1,908 million, or 32% in 2005, and $1,749 million, or 28% in 2004. Internet services rev- enue was $2,018 million in 2006, or 14% of Enterprise Business’s revenues, the first year Enterprise Business offered Internet services. The Internet suite of products is Enterprise Business’ fastest growing and includes Private IP, IP VPN, Web Hosting and VoIP. Enterprise Business 2005 revenues of $6,018 million declined $178 million compared to 2004, primarily due to a 3.5% decline in busi- ness access lines, reflecting competition and a shift to high-speed, high volume special access lines. Wholesale Our Wholesale revenues relate to domestic wholesale services, which include all wholesale traffic sold in the United States, as well as international traffic that originates in the United States. In the year ended December 31, 2006, our Verizon Business Wholesale revenues of $3,381 million, increased $2,005 million, or 145.7%, compared to 2005, primarily due to the MCI acquisition. Local and long distance voice products, including transport, repre- sented $1,601 million or 47% of the market’s total revenue in 2006, the first year the Wholesale business group has offered voice prod- ucts. Wholesale revenue is influenced by aggressive competitive pricing, in particular long distance voice services. Wholesale data and Internet revenues were $1,780 million, or 52% of total Wholesale revenue for the year ended December 31, 2006, $1,376 million, or 100% of total Wholesale revenue in 2005 and $1,218 mil- lion, or 100% of total Wholesale revenues in 2004. International and Other Our International operations serve businesses, government entities and telecommunication carriers outside of the United States. Other operations include our Skytel paging business. Our revenues from International and Other in the year ended December 31, 2006 were $3,110 million. This market represents a new revenue stream to Verizon resulting from the MCI acquisition. International and Other had voice revenue of $1,822 million in the year ended December 31, 2006, or 58% of the total International and Other revenues. Internet revenue represented $894 million, or 29% of total revenue in the period. Data revenue was $394 million, or 13% of total International and Other revenue in the year ended December 31, 2006. Operating Expenses Years Ended December 31, 2006 (dollars in millions) 2004 2005 Cost of services and sales Selling, general and administrative expense 12,116 9,590 Depreciation and amortization expense $ 24,522 $ 15,604 $ 14,830 8,621 8,910 $ 46,228 $ 32,824 $ 32,361 8,419 8,801 Cost of Services and Sales Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits, materials and supplies, contracted services, network access and transport costs, customer provisioning costs, computer systems support, costs to support our outsourcing contracts and technical facilities, contributions to the universal service fund, customer provi- sioning costs and cost of products sold. Aggregate customer care costs, which include billing and service provisioning, are allocated between cost of services and sales and selling, general and admin- istrative expense. Cost of services and sales increased by $8,918 million, or 57.2% in 2006 compared to 2005. These increases were primarily due to the MCI merger in 2006 partially offset by the net impact of other cost changes. Higher costs associated with our growth businesses and annual wage increases were partially offset by productivity improve- ment initiatives, which reduced cost of services and sales expenses in 2006. Expenses were also impacted by increased net pension and other postretirement benefit costs. The overall impact of the 2006 25 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued assumption changes combined with the impact of lower than expected actual asset returns over the past several years, resulted in pension and other postretirement benefit expense of $1,408 million (primarily in cost of services and sales) in 2006 compared to net pension and postretirement benefit expense of $1,248 million in 2005. Further, expenses decreased in both years due to the discon- tinuation of non-strategic businesses, including the termination of a large commercial inventory management contract in 2005. In 2005, our cost of services and sales increased by $774 million, or 5.2% compared to 2004. Costs in 2005 were impacted by increased pension and other postretirement benefit costs. At December 31, 2004, in connection with an evaluation of key employee benefit plan assumptions, the discount rate assumption was lowered from 6.25% in 2004 to 5.75% in 2005, consistent with interest rate levels at the end of 2004. Further, there was an increase in the retiree health care cost trend rates. The overall impact of these assumption changes, combined with the impact of lower than expected actual asset returns over the last several years, resulted in net pension and other postretirement benefit expense (primarily in cost of services and sales) of $1,248 million in 2005, compared to net pension and postretirement benefit expense of $803 million in 2004. Also con- tributing to expense increases in cost of services and sales were higher costs associated with our growth businesses. Further, the expense increase was impacted by favorable adjustments to our interconnection expense in 2004, as a result of our ongoing reviews of local interconnection expense charged by CLECs and settlements with carriers. Selling, General and Administrative Expense Selling, general and administrative expenses in 2006 increased by $3,697 million or 43.9% compared to 2005. These increases were primarily due to the inclusion of expenses from the former MCI in 2006 partially offset by synergy savings resulting from our merger integration efforts, the impact of gains from real estate sales and lower bad debt costs. In 2005, our selling, general and administrative expense decreased by $202 million, or 2.3% compared to 2004. This decrease was attributable to gains on the sale of real estate in 2005, lower property and gross receipts taxes and reduced bad debt costs, partially offset by higher net pension and benefit costs, as described above, and a prior year gain on the sale of two small business units. Depreciation and Amortization Expense The increase in depreciation and amortization expense of $789 mil- lion, or 9.0% in 2006 was mainly driven by the acquisition of MCI’s depreciable property and equipment and finite-lived intangibles, including its customer lists and capitalized non-network software, measured at fair value and by growth in depreciable telephone plant and non-network software assets. The decrease in depreciation and amortization expense of $109 million or 1.2%, in 2005 compared to 2004 was mainly driven by lower rates of depreciation, partially offset by higher plant, property and equipment balances and soft- ware amortization costs. Segment Income Years Ended December 31, 2006 (dollars in millions) 2004 2005 Segment Income $ 1,634 $ 1,906 $ 2,652 Segment income decreased by $272 million, or 14.3% in 2006 and by $746 million, or 28.1% in 2005, due to the after-tax impact of operating revenues and operating expenses described above, along with the impact of favorable income tax adjustments in 2005. 26 Special and non-recurring items not included in Verizon Wireline’s segment income totaled $407 million, ($168) million and $346 million in 2006, 2005, and 2004 respectively. Special and non-recurring items in 2006 included costs associated with severance activity, pension settlement losses, Verizon Center relocation-related costs, and merger integration costs. Merger integration costs primarily included costs related to advertising and re-branding initiatives, and labor and contractor costs related to information technology integra- tion initiatives. Special and non-recurring items in 2005 related to the Hawaii results of operations and gain on the sale of the Hawaii wire- line operations, the net gain on the sale of a New York City office building, changes to management retirement benefit plans, sever- ance costs, and Verizon Center relocation-related costs. Special and non-recurring items in 2004 primarily included pension settlement losses, operating asset losses, and costs associated with the early retirement of debt, partially offset by an expense credit resulting from the favorable resolution of pre-bankruptcy amounts due from MCI as well as a gain on the sale of an investment. Domestic Wireless Our Domestic Wireless segment provides wireless voice and data services and equipment sales across the United States. This seg- ment primarily represents the operations of the Verizon Wireless joint venture with Vodafone. Verizon owns a 55% interest in the joint ven- ture and Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless. Operating Revenues Years Ended December 31, 2006 (dollars in millions) 2004 2005 Wireless sales and services $ 38,043 $ 32,301 $ 27,662 Domestic Wireless’s total revenues of $38,043 million were $5,742 million, or 17.8% higher in 2006 compared to 2005. Service rev- enues of $32,796 million were $4,665 million, or 16.6% higher than 2005. The service revenue increase was primarily due to a 15.0% increase in customers as of December 31, 2006 compared to December 31, 2005, and increased average revenue per customer. Equipment and other revenue increased $1,077 million, or 25.8% in 2006 compared to 2005 principally as a result of increases in the number and price of wireless devices sold. Other revenue also increased due to increases in regulatory fees, primarily the universal service fund, and cost recovery surcharges. Our Domestic Wireless segment ended 2006 with 59.1 million cus- tomers, an increase of 7.7 million net new customers, or 15.0% compared to December 31, 2005. Substantially all of the net cus- tomers added during 2006 were retail customers. The overall composition of our Domestic Wireless customer base as of December 31, 2006 was 92.6% retail postpaid, 3.6% retail prepaid and 3.8% resellers. Total average monthly churn, the rate at which customers disconnect service, decreased to 1.17% in 2006 com- pared to 1.26% in 2005. Retail postpaid churn decreased to 0.9% in 2006 compared to 1.1% in 2005. Average revenue per customer per month increased 0.6% to $49.80 in 2006 compared to 2005. Average service revenue per customer reflected a 72% increase in data revenue per customer in 2006, compared to 2005, driven by increased use of our messaging, VZAccess and other data services. Retail service revenue per retail customer of $50.44 also grew in 2006, compared to 2005. However, Domestic Wireless continued to experience an increase in the pro- portion of customers on its Family Share price plans, which put downward pressure on average service revenue per customer during Management’s Discussion and Analysis of Results of Operations and Financial Condition continued 2006. Data revenues were $4,475 million and accounted for 13.6% of service revenue in 2006, compared to $2,243 million and 8.0% of service revenue in 2005. Domestic Wireless’s total revenues of $32,301 million were $4,639 million, or 16.8% higher in 2005 compared to 2004. Service rev- enues of $28,131 million were $3,731 million, or 15.3% higher than 2004. This revenue growth was primarily due to increased cus- tomers, partially offset by a decrease in average revenue per customer per month, and increases in equipment and other revenue, principally as a result of an increase in wireless devices sold together with an increase in revenue per unit sold. At December 31, 2005, customers totaled 51.3 million, an increase of 17.2% com- pared to December 31, 2004. Retail net additions accounted for 7.2 million, or 95.8% of the total net additions. Total churn decreased to 1.3% in 2005, compared to 1.5% in 2004. Retail postpaid churn decreased to 1.1% in 2005 compared to 1.3% in 2004. Average revenue per customer per month decreased 1.5% to $49.49 in 2005 compared to 2004, primarily due to pricing changes to our America’s Choice and Family Share plans earlier in the year. Partially offsetting the impact of these pricing changes was a 71.7% increase in data revenue per customer in 2005 compared to 2004, driven by increased use of our messaging and other data services. Data rev- enues were $2,243 million and accounted for 8.0% of service revenue in 2005, compared to $1,116 million and 4.6% of service revenue in 2004. Operating Expenses Years Ended December 31, 2006 (dollars in millions) 2004 2005 Cost of services and sales Selling, general and administrative expense 12,039 4,913 Depreciation and amortization expense $ 11,491 $ 9,393 $ 7,747 9,591 10,768 4,486 4,760 $ 28,443 $ 24,921 $ 21,824 Cost of Services and Sales Cost of services and sales, which are costs to operate the wireless network as well as the cost of roaming, long distance and equipment sales, increased by $2,098 million, or 22.3% in 2006 compared to 2005. Cost of services increased due to higher wireless network costs in 2006 caused by increased network usage relating to both voice and data services, partially offset by lower rates for long dis- tance, roaming and local interconnection. Cost of equipment sales grew by 29.7% in 2006 compared to 2005. The increase was prima- rily attributed to an increase in wireless devices sold, resulting from an increase in equipment upgrades and gross retail activations, together with an increase in cost per unit driven by increased sales of higher cost advanced wireless devices, in 2006, compared to 2005. Cost of services and sales increased by $1,646 million, or 21.2% in 2005 compared to 2004. This increase was primarily due to higher network charges resulting from increased network usage in 2005 compared to 2004, and an increase in cost of equipment sales driven by increased wireless devices sold and equipment upgrades in 2005 compared to 2004. Selling, General and Administrative Expense Selling, general and administrative expense increased by $1,271 mil- lion, or 11.8% in 2006 compared to 2005. This increase was primarily due to an increase in salary and benefits expense of $632 million, resulting from an increase in employees, primarily in the sales and customer care areas, and higher per employee salary and benefit costs. Advertising and promotion expense increased $207 million in 2006, compared to 2005. Also contributing to the increase were higher costs associated with regulatory fees, primarily the uni- versal service fund, which increased by $167 million in 2006 com- pared to 2005. Selling, general and administrative expense increased by $1,177 mil- lion, or 12.3% in 2005 compared to 2004. This increase was primarily due to increased salary and benefits expense and higher sales commissions, related to an increase in customer additions and renewals during 2005 compared to 2004. Depreciation and Amortization Expense Depreciation and amortization expense increased by $153 million, or 3.2% in 2006 compared to 2005 and increased by $274 million, or 6.1% in 2005 compared to 2004. These increases were primarily due to increased depreciation expense related to the increases in depre- ciable assets. The increase in 2006 was partially offset by a decrease in amortization expense due to fully amortized customer lists. Segment Income Years Ended December 31, 2006 (dollars in millions) 2004 2005 Segment Income $ 2,976 $ 2,219 $ 1,645 Segment income increased by $757 million, or 34.1% in 2006 com- pared to 2005 and increased by $574 million, or 34.9% in 2005 compared to 2004, primarily as a result of the after-tax impact of oper- ating revenues and operating expenses described above, partially offset by higher minority interest expense. Special and non-recurring items of $42 million after-tax were due to the adoption of SFAS 123 (R). There were no special items affecting this segment in 2005 or 2004. Increases in minority interest expense in 2006 and 2005 were princi- pally due to the increased income of the wireless joint venture and the significant minority interest attributable to Vodafone. SPECIAL ITEMS Disposition of Businesses and Investments Sale of Discontinued Operations On December 1, 2006, we closed the sale of Verizon Dominicana. The transaction resulted in net pretax cash proceeds of $2,042 mil- lion. The U.S. taxes that became payable and were recognized at the time the transaction closed significantly exceeded the amount of the pretax gain of $30 million. The sale resulted in an after-tax loss of $541 million (or $.18 per diluted share). There were no similar items in 2005. In 2004, we closed on the sale of Verizon Information Services Canada Inc. and recorded a gain of $1,017 million ($516 million after-tax, or $.18 per diluted share). Sales of Businesses, Net During 2005, we sold our wireline and directory businesses in Hawaii, including Verizon Hawaii Inc. which operated approximately 700,000 switched access lines, as well as the services and assets of Verizon Long Distance, Verizon Online, Verizon Information Services and Verizon Select Services Inc. in Hawaii, to an affiliate of The Carlyle Group for $1,326 million in cash proceeds. In connection with this sale, we recorded a net pretax gain of $530 million ($336 million after-tax, or $.12 per diluted share). There were no similar items in 2006 and 2004. Sales of Investments, Net During 2004, we recorded a pretax gain of $787 million ($565 million after-tax, or $.20 per diluted share) on the sale of our 20.5% interest in TELUS in an underwritten public offering in the U.S. and Canada. In connection with this sale transaction, Verizon recorded a contri- bution of $100 million to Verizon Foundation to fund its charitable 27 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued activities and increase its self-sufficiency. Consequently, we recorded a net gain of $500 million after taxes, or $.18 per diluted share related to this transaction and the accrual of the Verizon Foundation contribution. Also during 2004, we sold all of our investment in Iowa Telecom pre- ferred stock, which resulted in a pretax gain of $43 million ($43 million after-tax, or $.02 per diluted share). This preferred stock was received in 2000 in connection with the sale of access lines in Iowa. There were no similar items in 2006 and 2005. Spin-off Related Charges In 2006, we recorded pretax charges of $117 million ($101 million after-tax, or $.03 per diluted share) for costs related to the spin-off of Idearc. These costs primarily consisted of banking and legal fees, as well as filing fees, printing and mailing costs. There were no similar charges in 2005 and 2004. Merger Integration Costs In 2006, we recorded pretax charges of $232 million ($146 million after-tax, or $.05 per diluted share) related to integration costs asso- ciated with the MCI acquisition that closed on January 6, 2006. These costs are primarily comprised of advertising and other costs related to re-branding initiatives and systems integration activities. There were no similar charges incurred in 2005 and 2004. Facility and Employee-Related Items During 2006, we recorded pretax charges of $184 million ($118 mil- lion after-tax) in connection with the continued relocation of employees and business operations to Verizon Center located in Basking Ridge, New Jersey. During 2005, we recorded a net pretax gain of $18 million ($8 million after-tax) in connection with this relo- cation of our new operations center, Verizon Center, including a pretax gain of $120 million ($72 million after-tax) related to the sale of a New York City office building, partially offset by a pretax charge of $102 million ($64 million after-tax) primarily associated with relo- cation, employee severance and related activities. There were no similar charges incurred in 2004. During 2006, we recorded net pretax severance, pension and benefits charges of $425 million ($258 million after-tax, including $3 million of income recorded to discontinued operations, or $.09 per diluted share). These charges included net pretax pension settlement losses of $56 million ($26 million after-tax, or $.01 per diluted share) related to employees that received lump-sum distributions primarily resulting from our separation plans. These charges were recorded in accor- dance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS No. 88), which requires that settlement losses be recorded once prescribed payment thresholds have been reached. Also included are pretax charges of $369 million ($228 million after- tax, or $.08 per diluted share), for employee severance and severance-related costs in connection with the involuntary separation of approximately 4,100 employees. In addition, during 2005 we recorded a charge of $59 million ($36 million after-tax, or $.01 per diluted share) associated with employee severance costs and sever- ance-related activities in connection with the voluntary separation program for surplus union-represented employees. During 2005, we recorded a net pretax charge of $98 million ($59 mil- lion after-tax) related to the restructuring of the Verizon management retirement benefit plans. This pretax charge was recorded in accor- dance with SFAS No. 88, and SFAS No. 106, Employers’ Accounting 28 for Postretirement Benefits Other Than Pensions (SFAS No. 106) and includes the unamortized cost of prior pension enhancements of $430 million offset partially by a pretax curtailment gain of $332 mil- lion related to retiree medical benefits. In connection with this restructuring, management employees: no longer earn pension bene- fits or earn service towards the company retiree medical subsidy after June 30, 2006; received an 18-month enhancement of the value of their pension and retiree medical subsidy; and receive a higher sav- ings plan matching contribution. During 2004, we recorded pretax pension settlement losses of $805 million ($492 million after-tax) related to employees that received lump-sum distributions during 2004 in connection with the voluntary separation plan under which more than 21,000 employees accepted the separation offer in the fourth quarter of 2003. These charges were recorded in accordance with SFAS No. 88. In addition, we recorded a $7 million after-tax charge in income from discontinued operations, related to the 2003 separation plan. Tax Matters During 2005, we recorded tax benefits of $336 million in connection with capital gains and prior year investment losses. As a result of the capital gain realized in 2005 in connection with the sale of our Hawaii businesses, we recorded a tax benefit of $242 million related to capital losses incurred in previous years. The investment losses pertain to Iusacell, CTI Holdings, S.A. (CTI) and TelecomAsia. Also during 2005, we recorded a net tax provision of $206 million related to the repatriation of foreign earnings under the provisions of the American Jobs Creation Act of 2004, for two of our foreign investments. As a result of the capital gain realized in 2004 in connection with the sale of Verizon Information Services Canada, we recorded tax bene- fits of $234 million in the fourth quarter of 2004 pertaining to prior year investment impairments. The investment impairments primarily related to debt and equity investments in CTI, Cable & Wireless plc and NTL Incorporated. Other Special Items During 2006, we recorded pretax charges of $26 million ($16 million after-tax, or $.01 per diluted share) resulting from the extinguishment of debt assumed in connection with the completion of the MCI merger. As discussed in the “Cumulative Effect of Accounting Change” sec- tion, during 2006, we recorded after-tax charges of $42 million ($.01 per diluted share) to recognize the adoption of SFAS No. 123 (R). During 2005, we recorded pretax charges of $139 million ($133 mil- lion after-tax, or $.05 per diluted share) including a pretax impairment charge of $125 million ($125 million after-tax, or $.04 per diluted share) pertaining to aircraft leased to airlines involved in bankruptcy proceedings and a pretax charge of $14 million ($8 mil- lion after-tax, or less than $.01 per diluted share) in connection with the early extinguishment of debt. In the second quarter of 2004, we recorded an expense credit of $204 million ($123 million after-tax, or $.04 per diluted share) resulting from the favorable resolution of pre-bankruptcy amounts due from MCI that were recovered upon the emergence of MCI from bankruptcy. Also during 2004, we recorded a charge of $113 million ($87 million after-tax, or $.03 per diluted share) related to operating asset losses Management’s Discussion and Analysis of Results of Operations and Financial Condition continued pertaining to our international long distance and data network. In addition, we recorded pretax charges of $55 million ($34 million after-tax, or $.01 per diluted share) in connection with the early extinguishment of debt. CONSOLIDATED FINANCIAL CONDITION Years Ended December 31, Cash Flows Provided By (Used In) Operating activities Investing activities Financing activities Increase (Decrease) In Cash and 2006 (dollars in millions) 2004 2005 $ 24,106 $ 22,025 $ 21,791 (10,343) (18,492) (9,856) (5,034) (15,616) (6,031) Cash Equivalents $ 2,459 $ (1,501) $ 1,592 We use the net cash generated from our operations to fund network expansion and modernization, repay external financing, pay divi- dends and invest in new businesses. Additional external financing is utilized when necessary. While our current liabilities typically exceed current assets, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that capital spending require- ments will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility. Cash Flows Provided By Operating Activities Our primary source of funds continues to be cash generated from operations. In 2006, the increase in cash from operating activities compared to 2005 was primarily due to higher earnings at Domestic Wireless, which included higher minority interest earnings, and lower dividends paid to minority partners. Total minority interest earnings, net of dividends paid to minority interest partners, was $3.2 billion in 2006 compared to $1.7 billion in 2005. In addition, higher operating cash flow in 2006 compared to 2005 was due to lower cash taxes paid in 2006, resulting from 2005 tax payments related to foreign operations and investments sold during the fourth quarter of 2004. Partially offsetting these increases were significant 2005 repatriations of foreign earnings of unconsolidated businesses. In 2005, the increase in cash from operations compared to 2004 was primarily driven higher by the repatriation of $2.2 billion of foreign earnings from unconsolidated businesses, higher minority interest earnings, net of dividends paid to minority partners of $1.0 billion and lower severance payments in 2005. These increases were largely offset by higher cash income tax payments, including taxes paid in 2005 related to the 2004 sales of Verizon Information Services Canada and TELUS shares, and higher pension fund contributions. Operating cash flows from discontinued operations decreased $505 million to $1,076 million in 2006 due to the completion of the Idearc spin-off on November 17, 2006 and the close of the sale of Verizon Dominicana on December 1, 2006, partially offset by the operating activities of the remaining assets held for sale. Operating cash flows from discontinued operations decreased $34 million from $1,615 million in 2004 to $1,581 million in 2005 due to the completion of the sale of Verizon Information Services Canada in the fourth quarter of 2004, partially offset by operating activities of the remaining assets held for sale. Cash Flows Used In Investing Activities Capital expenditures continue to be our primary use of capital resources as they facilitate the introduction of new products and serv- ices, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks. Including capitalized software, we invested $10,259 million in our Wireline busi- ness in 2006, compared to $8,267 million and $7,118 million in 2005 and 2004, respectively. We also invested $6,618 million in our Verizon Wireless business in 2006, compared to $6,484 million and $5,633 mil- lion in 2005 and 2004, respectively. The increase in capital spending at Wireline is mainly driven by the acquisition of MCI, coupled with increased spending in high growth areas such as broadband. Capital spending at Verizon Wireless represents our continuing effort to invest in this high growth business. In 2007, capital expenditures including capitalized software are expected to be in the range of $17.5 billion to $17.9 billion. In 2006, we invested $1,422 million in acquisitions and investments in businesses, including $2,809 million to acquire thirteen 20 MHz licenses in connection with the FCC Advanced Wireless Services auction and $57 million to acquire other wireless properties. This was offset by MCI’s cash balances of $2,361 million at the date of the merger, of which $779 million was used for a cash payment to MCI shareholders. In 2005, we invested $4,684 million in acquisi- tions and investments in businesses, including $3,003 million to acquire NextWave Telecom Inc. (NextWave) personal communica- tions services licenses, $641 million to acquire 63 broadband wireless licenses in connection with FCC auction 58, $419 million to purchase Qwest Wireless, LLC’s spectrum licenses and wireless network assets in several existing and new markets, $230 million to purchase spectrum from MetroPCS, Inc. and $297 million for other wireless properties and licenses. In 2004, we invested $1,196 million in acquisitions and investments in businesses, including $1,052 mil- lion for wireless licenses and businesses, including a NextWave license covering the New York metropolitan area, and $144 million related to Verizon’s limited partnership investments in entities that invest in affordable housing projects. In 2005, we received cash proceeds of $1,326 million in connection with the sale of Verizon’s wireline operations in Hawaii. In 2004, we received cash proceeds of $117 million from the sale of a small business unit. Our short-term investments include principally cash equivalents held in trust accounts for payment of employee benefits. In 2006, 2005 and 2004, we invested $1,915 million, $1,955 million and $1,801 mil- lion, respectively, in short-term investments, primarily to pre-fund active employees’ health and welfare benefits. Proceeds from the sales of all short-term investments, principally for the payment of these benefits, were $2,205 million, $1,609 million and $1,711 million in the years 2006, 2005 and 2004, respectively. Other, net investing activities for 2006 include cash proceeds of $283 million from property sales. Other, net investing activities for 2005 includes a net investment of $913 million for the purchase of 43.4 million shares of MCI common stock from eight entities affili- ated with Carlos Slim Helú, offset by cash proceeds of $713 million from property sales, including a New York City office building, and $349 million of repatriated proceeds from the sales of European investments in prior years. Other, net investing activities for 2004 includes net cash proceeds of $1,632 million received in connection with the sale of our 20.5% interest in TELUS and $650 million in 29 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Cash of $5,401 million was used to reduce our total debt during 2004. We repaid $2,315 million and $2,769 million of Wireline and Verizon corporate long-term debt, respectively. The Wireline debt repayment includes the early retirement of $1,275 million of long- term debt and $950 million of other long-term debt at maturity. The corporate debt repayment includes $1,984 million of zero-coupon convertible notes redeemed by Verizon corporate and $723 million of other corporate long-term debt at maturity. Also, during 2004, we decreased our short-term borrowings by $747 million and Verizon corporate issued $500 million of long-term debt. Our ratio of debt to debt combined with shareowners’ equity was 42.8% at December 31, 2006 compared to 49.1% at December 31, 2005. As of December 31, 2006, we had no bank borrowings outstanding. We also had approximately $6.2 billion of unused bank lines of credit (including a $6.0 billion three-year committed facility that expires in September 2009 and various other facilities totaling approximately $400 million) and we had shelf registrations for the issuance of up to $4.5 billion of unsecured debt securities. The debt securities of Verizon and our telephone subsidiaries continue to be accorded high ratings by primary rating agencies. In order to simplify and streamline our financing entities, Verizon Global Funding merged into Verizon Communications on February 1, 2006. Verizon Communications is now the primary issuer of all long-term and short-term debt for Verizon. The short-term ratings of Verizon Communications are: Moody’s P-2; S&P A-1; and Fitch F1. The long-term ratings of Verizon Communications are: Moody’s A3 with stable outlook; S&P A with negative outlook; and Fitch A+ with stable outlook. In June 2006, the long-term debt rating of Verizon Wireless was upgraded by Moody’s to A2 from A3 and assigned a stable outlook and the long-term debt rating of Verizon Communications was affirmed at A3 with a stable outlook. In December 2006, Fitch affirmed the long-term debt rating of Verizon Communications at A+ with a stable outlook. Following the maturity of its remaining external debt in December 2006, Moody’s and Fitch with- drew the rating on Verizon Wireless. We and our consolidated subsidiaries are in compliance with all of our debt covenants. As in prior years, dividend payments were a significant use of capital resources. We determine the appropriateness of the level of our div- idend payments on a periodic basis by considering such factors as long-term growth opportunities, internal cash requirements and the expectations of our shareowners. In 2006 and 2005, Verizon declared quarterly cash dividends of $.405 per share. In 2004, we declared quarterly cash dividends of $.385 per share. Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans. On January 19, 2006, the Board of Directors determined that no addi- tional common shares could be purchased under previously authorized share repurchase programs and gave authorization to repurchase of up to 100 million common shares terminating no later than the close of business on February 28, 2008. We repurchased $1,700 million of our common stock as part of this program. connection with sales of our interests in various other investments, including a partnership venture with Crown Castle International Corp., EuroTel Bratislava, a.s. and Iowa Telecom preferred stock. In 2006, investing activities of discontinued operations include net pretax cash proceeds of $2,042 million in connection with the sale of Verizon Dominicana. In 2005, investing activities of discontinued operations are primarily related to capital expenditures related to discontinued operations. In 2004, investing activities of discontinued operations include cash proceeds of $1,603 million from the sale of Verizon Information Services Canada, partially offset by capital expenditures related to discontinued operations. Under the terms of an investment agreement, Vodafone had the right to require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone’s interest in Verizon Wireless at designated times (put windows) at its then fair market value, not to exceed $10 billion in any one put window. Vodafone had the right to require the purchase of up to $10 billion during a 61-day period which opened on June 10 and closed on August 9 in 2006, and did not exercise that right. As of December 31, 2006, Vodafone only has the right to require the purchase of up to $10 billion worth of its interest, during a 61-day period opening on June 10 and closing on August 9 in 2007, under its one remaining put window. Vodafone also may require that Verizon Wireless pay for up to $7.5 billion of the required repurchase through the assumption or incurrence of debt. In the event Vodafone exercises its one remaining put right, we (instead of Verizon Wireless) have the right, exercisable at our sole discretion, to purchase up to $2.5 billion of Vodafone’s interest for cash or Verizon stock at our option. Cash Flows Used In Financing Activities Our total debt was reduced by $1,896 million during 2006. We repaid $6,838 million of Wireline debt, including premiums associated with the retirement of $5,665 million of aggregate principal amount of long-term debt assumed in connection with the MCI merger. The Wireline repay- ments also included the early retirement/prepayment of $697 million of long-term debt and $155 million of other long-term debt at maturity. We repaid $2.5 billion of Domestic Wireless 5.375% fixed rate notes that matured on December 15, 2006. At December 31, 2006, Verizon Wireless had no third-party debt. Also, we redeemed the $1,375 million accreted principal of our remaining zero-coupon convertible notes and retired $482 million of other corporate long-term debt at maturity. These repayments were partially offset by our issuance of long-term debt with a total aggregate principal amount of $4,000 million, resulting in cash proceeds of $3,958 million, net of discounts, issuance costs and the receipt of cash proceeds related to hedges on the interest rate of an anticipated financing. In connection with the spin-off of Idearc, we received net cash proceeds of approximately $2 billion and retired debt in the aggregate principal amount of approximately $7 billion (see Other Consolidated Results – Discontinued Operations – Verizon Information Services). Cash of $240 million was used to reduce our total debt during 2005. We repaid $1,533 million of Domestic Wireless, $1,183 million of Wireline and $1,109 million of Verizon corporate long-term debt. The Wireline debt repayment included the early retirement of $350 million of long-term debt and $806 million of other long-term debt at matu- rity. This decrease was largely offset by the issuance by Verizon corporate of long-term debt with a total principal amount of $1,500 million, resulting in total cash proceeds of $1,478 million, net of dis- counts and costs, and an increase in our short-term borrowings of $2,098 million. 30 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Increase (Decrease) In Cash and Cash Equivalents Our cash and cash equivalents at December 31, 2006 totaled $3,219 million, a $2,459 increase compared to cash and cash equivalents at December 31, 2005 of $760 million. The increase in cash and cash equivalents in 2006 was primarily driven by proceeds from the dis- position of Verizon Dominicana and the spin-off of Idearc, cash acquired in connection with the merger of MCI and higher debt bor- rowings, partially offset by increased capital expenditures and higher repayments of borrowings. Our cash and cash equivalents at December 31, 2005 totaled $760 million, a $1,501 million decrease compared to cash and cash equivalents at December 31, 2004 of $2,261 million. The decrease in cash and cash equivalents in 2005 was primarily driven by increased capital expenditures and higher acquisitions and investments, partially offset by proceeds from the sale of businesses and lower repayments of borrowings. Employee Benefit Plan Funded Status and Contributions In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires the recognition of a defined benefit postretirement plan’s funded status as either an asset or liability on the balance sheet. SFAS No. 158 also requires the immediate recognition of the unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of Other Accumulated Comprehensive Income, net of applicable income taxes. Additionally, the fair value of plan assets must be determined as of the company’s year-end. We adopted SFAS No. 158 effective December 31, 2006 which resulted in a net decrease to shareowners’ investment of $6,883 million. This included a net increase in pension obligations of $2,403 million, an increase in Other Postretirement Benefits Obligations of $10,828 million and an increase in Other Employee Benefit Obligations of $31 million, partially offset by a net decrease of $1,205 million to reverse the Additional Minimum Pension Liability and an increase in deferred taxes of $5,174 million. Prior to the adoption of SFAS No. 158 we evaluated each pension plan to determine whether an additional minimum pension liability was required or whether any adjustment was necessary as deter- mined by the provisions of SFAS No. 87, Employers’ Accounting for Pensions. In 2005, we recorded a benefit of $51 million, net of tax, primarily in Employee Benefit Obligations in the consolidated balance Off Balance Sheet Arrangements and Contractual Obligations sheets. The changes in the assets and liabilities were recorded in Accumulated Other Comprehensive Loss, net of a tax benefit, in shareowners’ investment in the consolidated balance sheets. We operate numerous qualified and nonqualified pension plans and other postretirement benefit plans. These plans primarily relate to our domestic business units. The majority of Verizon’s pension plans are adequately funded. We contributed $451 million, $593 million and $145 million in 2006, 2005 and 2004, respectively, to our quali- fied pension trusts. We also contributed $117 million, $105 million and $114 million to our nonqualified pension plans in 2006, 2005 and 2004, respectively. Based on the funded status of the plans at December 31, 2006, we anticipate qualified pension trust contributions of $510 million in 2007. Our estimate of required qualified pension trust contributions for 2008 is approximately $300 million. Nonqualified pension contri- butions are estimated to be approximately $120 million and $180 million for 2007 and 2008, respectively. Contributions to our other postretirement benefit plans generally relate to payments for benefits primarily on an as-incurred basis since the other postretirement benefit plans do not have funding requirements similar to the pension plans. We contributed $1,099 mil- lion, $1,040 million and $1,099 million to our other postretirement benefit plans in 2006, 2005 and 2004, respectively. Contributions to our other postretirement benefit plans are estimated to be approxi- mately $1,210 million in 2007 and $1,580 million in 2008, prior to anticipated receipts related to Medicare subsidies. Leasing Arrangements We are the lessor in leveraged and direct financing lease agreements under which commercial aircraft and power generating facilities, which comprise the majority of the portfolio, along with industrial equipment, real estate, telecommunications and other equipment are leased for remaining terms of less than 1 year to 49 years as of December 31, 2006. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonrecourse debt relating to leveraged lease transactions. Since we have no gen- eral liability for this debt, which holds a senior security interest in the leased assets and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with generally accepted accounting principles. All recourse debt is reflected in our consolidated balance sheets. See “Special Items” for a discussion of lease impairment charges. Contractual Obligations and Commercial Commitments The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2006. Additional detail about these items is included in the notes to the consolidated financial statements. Contractual Obligations Long-term debt (see Note 11) Capital lease obligations (see Note 10) Total long-term debt Interest on long-term debt (see Note 11) Operating leases (see Note 10) Purchase obligations (see Note 21) Other long-term liabilities (see Note 15) Total contractual obligations Total $ 32,425 360 32,785 23,300 6,843 812 3,600 $ 67,340 Less than 1 year $ 4,084 55 4,139 1,915 1,739 566 1,720 $ 10,079 Payments Due By Period 1-3 years 3-5 years $ 3,784 101 3,885 3,449 2,192 217 1,880 $ 11,623 $ $ 5,316 81 5,397 2,965 1,183 16 – 9,561 (dollars in millions) More than 5 years $ 19,241 123 19,364 14,971 1,729 13 – $ 36,077 31 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Guarantees Foreign Currency Translation In connection with the execution of agreements for the sales of busi- nesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinan- cial matters, such as ownership of the securities being sold, as well as financial losses. As of December 31, 2006, letters of credit totaling $223 million had been executed in the normal course of business, which support sev- eral financing arrangements and payment obligations to third parties. MARKET RISK We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign cur- rency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate locks, foreign currency forwards and collars and equity options. We do not hold derivatives for trading purposes. It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposures to the var- ious market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates, equity prices and foreign exchange rates on our earnings. We do not expect that our net income, liquidity and cash flows will be materially affected by these risk management strategies. Interest Rate Risk The table that follows summarizes the fair values of our long-term debt and interest rate derivatives as of December 31, 2006 and 2005. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward parallel shifts in the yield curve. Our sensi- tivity analysis did not include the fair values of our commercial paper and bank loans because they are not significantly affected by changes in market interest rates. Fair Value assuming +100 basis point shift (dollars in millions) Fair Value assuming –100 basis point shift At December 31, 2006 Fair Value Long-term debt and interest rate derivatives $ 33,569 $ 31,724 $ 35,607 At December 31, 2005 Long-term debt and interest rate derivatives $ 37,340 $ 35,421 $ 39,478 32 The functional currency for our foreign operations is primarily the local currency. The translation of income statement and balance sheet amounts of our foreign operations into U.S. dollars are recorded as cumulative translation adjustments, which are included in Accumulated Other Comprehensive Loss in our consolidated bal- ance sheets. The translation gains and losses of foreign currency transactions and balances are recorded in the consolidated state- ments of income in Other Income and (Expense), Net and Income from Discontinued Operations, Net of Tax. At December 31, 2006, our primary translation exposure was to the Venezuelan bolivar, British pound and the euro. During 2005, we entered into zero cost euro collars to hedge a portion of our net investment in Vodafone Omnitel. In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and related amendments and interpretations, changes in the fair value of these contracts due to exchange rate fluctuations are recognized in Accumulated Other Comprehensive Loss and offset the impact of foreign currency changes on the value of our net investment in the operation being hedged. As of December 31, 2005, our positions in the zero cost euro collars have been settled. We have not hedged our accounting translation exposure to foreign currency fluctuations relative to the carrying value of our other investments. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS Significant Accounting Policies A summary of the significant accounting policies used in preparing our financial statements are as follows: • Special and non-recurring items generally represent revenues and gains as well as expenses and losses that are non-operational and/or non-recurring in nature. Special and non-recurring items include asset impairment losses, which were determined in accor- dance with our policy of comparing the fair value of the asset with its carrying value. The fair value is determined by quoted market prices or by estimates of future cash flows. There is inherent sub- jectivity involved in estimating future cash flows, which can have a significant impact on the amount of any impairment. • Verizon’s plant, property and equipment balance represents a sig- nificant component of our consolidated assets. Depreciation expense on Verizon’s local telephone operations is principally based on the composite group remaining life method and straight-line composite rates, which provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. We depreciate other plant, property and equipment generally on a straight-line basis over the estimated useful life of the assets. Changes in the remaining useful lives of assets as a result of tech- nological change or other changes in circumstances, including competitive factors in the markets where we operate, can have a significant impact on asset balances and depreciation expense. • We maintain benefit plans for most of our employees, including pension and other postretirement benefit plans. In the aggregate, the fair value of pension plan assets exceeds benefit obligations, which contributes to pension plan income. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets and health care trend rates are periodically updated Management’s Discussion and Analysis of Results of Operations and Financial Condition continued and impact the amount of benefit plan income, expense, assets and obligations (see “Consolidated Results of Operations – Consolidated Operating Expenses – Pension and Other Postretirement Benefits”). A sensitivity analysis of the impact of changes in these assumptions on the benefit obligations and expense (income) recorded as of December 31, 2006 and for the year then ended pertaining to Verizon’s pension and postretire- ment benefit plans is provided in the table below. Note that some of these sensitivities are not symmetrical as the calculations were based on all of the actuarial assumptions as of year-end. Percentage point change Benefit obligation increase (decrease) at December 31, 2006 (dollars in millions) Expense increase (decrease) for the year ended December 31, 2006 Pension plans discount rate + 1.00 - 1.00 Long-term rate of return on pension plan assets + 1.00 - 1.00 Postretirement plans discount rate Long-term rate of return on postretirement plan assets Health care trend rates + 1.00 - 1.00 + 1.00 - 1.00 + 1.00 - 1.00 $ $ $ $ (3,844) 4,597 – – (3,245) 3,693 – – 3,339 (2,731) (130) 266 (378) 378 (209) 236 (40) 40 472 (357) • Our accounting policy concerning the method of accounting applied to investments (consolidation, equity or cost) involves an evaluation of all significant terms of the investments that explic- itly grant or suggest evidence of control or influence over the operations of the entity in which we have invested. Where control is determined, we consolidate the investment. If we determine that we have significant influence over the operating and financial policies of an entity in which we have invested, we apply the equity method. We apply the cost method in situations where we determine that we do not have significant influence. • Our current and deferred income taxes, and associated valuation allowances, are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of busi- nesses and special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances. • Goodwill and other intangible assets are a significant component of our consolidated assets. Wireline goodwill of $5,310 million represents the largest component of our goodwill and, as required by SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), is periodically evaluated for impairment. The evaluation of Wireline goodwill for impairment is primarily based on a discounted cash flow model that includes estimates of future cash flows. There is inherent subjectivity involved in estimating future cash flows, which can have a material impact on the amount of any potential impairment. Wireless licenses of $50,959 million represent the largest component of our intangible assets. Our wireless licenses are indefinite-lived intangible assets, and as required by SFAS No. 142, are not amortized but are periodically evaluated for impairment. Any impairment loss would be deter- mined by comparing the fair value of the wireless licenses with their carrying value. For 2004 and 2003, we used a residual method, which determined fair value by estimating future cash flows of the wireless business. Beginning in 2005, we began using a direct value approach in accordance with a September 29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” The direct value approach also determines fair value by estimating future cash flows. There is inherent subjectivity involved in estimating future cash flows, which can have a material impact on the amount of any impairment. Other Recent Accounting Pronouncements Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires the recognition of a defined benefit postretirement plan’s funded status as either an asset or liability on the balance sheet. SFAS No. 158 also requires the immediate recognition of the unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of Other Accumulated Comprehensive Income, net of applicable income taxes. Additionally, the fair value of plan assets must be determined as of the company’s year-end. We adopted SFAS No. 158 effective December 31, 2006, which resulted in a net decrease to shareowners’ investment of $6,883 million. Uncertainty in Income Taxes In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. We are required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings (or to goodwill, in certain cases for a prior acquisi- tion) in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We anticipate that as a result of the adoption of FIN 48, we will record an adjustment to our opening retained earnings. We are also reviewing the potential impact of FIN 48 on prior purchase accounting. Any such purchase accounting adjustment will not impact retained earn- ings or current earnings. We are reviewing the final impact of the adoption of FIN 48. We anticipate that any required adjustment under the adoption of FIN 48 will not be material. 33 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued Leveraged Leases In July 2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2). FSP 13-2 requires that changes in the projected timing of income tax cash flows generated by a lever- aged lease transaction be recognized as a gain or loss in the year in which change occurs. We are required to adopt FSP 13-2 effective January 1, 2007. The cumulative effect of initially adopting this FSP will be recorded as an adjustment to opening retained earnings in the year of adoption. We anticipate that any required adjustment under the adoption of FSP 13-2 will not be material. Fair Value Measurements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157 expands disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. We are required to adopt SFAS No. 157 effective January 1, 2008 on a prospective basis. We are currently evaluating the impact this new standard will have on our future results of operations and financial position. OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS Recent Developments MCI Merger On January 6, 2006, Verizon acquired 100% of the outstanding common stock of MCI, Inc. (MCI) for a combination of Verizon common shares and cash. MCI was a global communications com- pany that provided Internet, data and voice communication services to businesses and government entities throughout the world and consumers in the United States. On April 9, 2005, Verizon entered into a stock purchase agreement with eight entities affiliated with Carlos Slim Helú to purchase 43.4 million shares of MCI common stock for $25.72 per share in cash plus an additional cash amount of 3% per annum from April 9, 2005, until the closing of the purchase of those shares. The transaction closed on May 17, 2005. The total cash payment was $1,121 million and the investment was originally accounted for as a cost invest- ment. No payments were made under a provision that required Verizon to pay an additional amount at the end of one year to the extent that the price of Verizon’s common stock exceeded $35.52 per share. We received a special dividend of $5.60 per MCI share on these 43.4 million MCI shares, or $243 million, on October 27, 2005. Under the terms of the merger agreement, MCI shareholders received .5743 shares of Verizon common stock ($5,050 million in the aggregate) and cash of $2.738 ($779 million in the aggregate) for each of their MCI shares. The merger consideration was equal to $20.40 per MCI share, excluding the $5.60 per share special divi- dend paid by MCI to its shareholders on October 27, 2005. There was no purchase price adjustment. Price Communications In August 2002, Verizon Wireless and Price Communications Corp. (Price) combined Price’s wireless business with a portion of Verizon Wireless. The resulting limited partnership, Verizon Wireless of the East LP (VZ East), is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited partner- ship interest in the new partnership which was exchangeable into 34 the common stock of Verizon Wireless if an initial public offering of that stock occurred, or into the common stock of Verizon on the fourth anniversary of the asset contribution date. On August 15, 2006, Verizon delivered 29.5 million shares of newly-issued Verizon common stock to Price valued at $1,007 million in exchange for Price’s limited partnership interest in VZ East. As a result of acquiring Price’s limited partnership interest, Verizon recorded goodwill of $345 million in the third quarter of 2006 attributable to its Domestic Wireless segment. Disposition of Businesses and Investments Verizon Dominicana C. por A., Telecomunicaciones de Puerto Rico, Inc., and Compañía Anónima Nacional Teléfonos de Venezuela During the second quarter of 2006, we reached definitive agree- ments to sell our interests in our Caribbean and Latin American telecommunications operations in three separate transactions to América Móvil, S.A. de C.V. (América Móvil), a wireless service provider throughout Latin America, and a company owned jointly by Teléfonos de México, S.A. de C.V. (Telmex) and América Móvil. We agreed to sell our 100 percent indirect interest in Verizon Dominicana C. por A. (Verizon Dominicana) and our 52 percent interest in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to América Móvil. An entity jointly owned by América Móvil and Telmex agreed to pur- chase our indirect 28.5 percent interest in CANTV. In accordance with SFAS No. 144 we have classified the results of operations of Verizon Dominicana and TELPRI as discontinued operations. CANTV continues to be accounted for as an equity method investment. On December 1, 2006, we closed the sale of Verizon Dominicana. The transaction resulted in net pretax cash proceeds of $2,042 mil- lion, net of a purchase price adjustment of $373 million. The U.S. taxes that became payable and were recognized at the time the transaction closed exceeded the $30 million pretax gain resulting in an after-tax loss of $541 million (or $.18 per diluted share). We expect to close the sale of our interest in TELPRI in 2007 subject to the receipt of regulatory approvals and in accordance with the terms of the definitive agreement. We expect that the sale will result in approximately $900 million in net pretax cash proceeds. During the second quarter of 2006, we entered into a definitive agree- ment to sell our indirect 28.5% interest in CANTV to an entity jointly owned by América Móvil and Telmex for estimated pretax proceeds of $677 million. Regulatory authorities in Venezuela never commenced the formal review of that transaction and the related tender offers for the remaining equity securities of CANTV. On February 8, 2007, after two prior extensions, the parties terminated the stock purchase agree- ment because the parties mutually concluded that the regulatory approvals would not be granted by the Government. In January 2007, the Bolivarian Republic of Venezuela (the Republic) declared its intent to nationalize certain companies, including CANTV. On February 12, 2007, we entered into a Memorandum of Understanding (MOU) with the Republic. The MOU provides that the Republic will offer to purchase all of the equity securities of CANTV through public tender offers in Venezuela and the United States at a price equivalent to $17.85 per ADS. If the tender offers are completed, the aggregate purchase price for Verizon’s shares would be $572 mil- lion. If the 2007 dividend that has been recommended by the CANTV Board is approved by shareholders and paid prior to the closing of the tender offers, this amount will be reduced by the amount of the divi- dend. Verizon has agreed to tender its shares if the offers are commenced. The Republic has agreed to commence the offers within Management’s Discussion and Analysis of Results of Operations and Financial Condition continued forty-five days assuming the satisfactory completion of its due dili- gence investigation of CANTV. The tender offers are subject to certain conditions including that a majority of the outstanding shares are ten- dered to the Government and receipt of regulatory approvals. Based upon the terms of the MOU and our current investment balance in CANTV, we expect that we will record a loss on our investment in the first quarter of 2007. The ultimate amount of the loss depends on a variety of factors, including the successful completion of the tender offer and the satisfaction of other terms in the MOU. Spin-off of Idearc On November 17, 2006 we completed the spin-off of Idearc to shareowners of Verizon. Verizon distributed a dividend of one share of Idearc common stock for every 20 shares of Verizon common stock. Cash was paid for fractional shares. The distribution of Idearc common stock is considered a tax free transaction for us and for our shareowners, except for the cash payments for fractional shares which are generally taxable. Idearc now owns what was the Verizon domestic print and Internet yellow pages directories publishing operations, which had been the principal component of our Information Services segment. This transaction resulted in an increase of nearly $9 billion in shareowners’ equity, as well as a reduction of total debt by more than $7 billion and we received approximately $2 billion in cash. Telephone Access Lines Spin-off On January 16, 2007, we announced a definitive agreement with FairPoint Communications, Inc. (FairPoint) that will result in Verizon establishing a separate entity for its local exchange and related busi- ness assets in Maine, New Hampshire and Vermont, spinning off that new entity to Verizon shareowners, and immediately merging it with and into FairPoint. Upon the closing of the transaction, Verizon shareowners will own approximately 60 percent of the new company and FairPoint stock- holders will own approximately 40 percent. Verizon Communications will not own any shares in FairPoint after the merger. In connection with the merger, Verizon shareowners will receive one share of FairPoint stock for approximately every 55 shares of Verizon stock held as of the record date. Both the spin-off and merger are expected to qualify as tax-free transactions, except to the extent that cash is paid to Verizon shareowners in lieu of fractional shares. The total value to be received by Verizon and its shareowners in exchange for these operations will be approximately $2,715 million. Verizon shareowners will receive approximately $1,015 million of FairPoint common stock in the merger, based upon FairPoint’s recent stock price and the terms of the merger agreement. Verizon will receive $1,700 million in value through a combination of cash distribu- tions to Verizon and debt securities issued to Verizon prior to the spin-off. Verizon may exchange these newly issued debt securities for certain debt that was previously issued by Verizon, which would have the effect of reducing Verizon’s then-outstanding debt. Redemption of Debt Debt assumed from MCI merger On January 17, 2006, Verizon announced offers to purchase two series of MCI senior notes, MCI $1,983 million aggregate principal amount of 6.688% Senior Notes Due 2009 and MCI $1,699 million aggregate principal amount of 7.735% Senior Notes Due 2014, at 101% of their par value. Due to the change in control of MCI that occurred in connection with the merger with Verizon on January 6, 2006, Verizon was required to make this offer to noteholders within 30 days of the closing of the merger of MCI and Verizon. Separately, Verizon notified noteholders that MCI was exercising its right to redeem both series of Senior Notes prior to maturity under the optional redemption procedures provided in the indentures. The 6.688% Notes were redeemed on March 1, 2006, and the 7.735% Notes were redeemed on February 16, 2006. In addition, on January 20, 2006, Verizon announced an offer to repurchase MCI $1,983 million aggregate principal amount of 5.908% Senior Notes Due 2007 at 101% of their par value. On February 21, 2006, $1,804 million of these notes were redeemed by Verizon. Verizon satisfied and discharged the indenture governing this series of notes shortly after the close of the offer for those note- holders who did not accept this offer. Zero-Coupon Convertible Notes Previously, Verizon Global Funding issued approximately $5,442 mil- lion in principal amount at maturity of zero-coupon convertible notes due 2021 which were callable by Verizon on or after May 15, 2006. On May 15, 2006, we redeemed the remaining $1,375 million accreted principal of the outstanding zero-coupon convertible notes at a redemption price of $639.76 per $1,000 principal plus interest of approximately $0.5767 per $1,000 principal. The total payment on the date of redemption was approximately $1,377 million. Other Debt Redemptions/Prepayments Other debt redemptions/prepayments included approximately $697 million of outstanding debt issuances at various rates associated with our operating telephone companies. Original maturity dates ranged from 2010 through 2026. On December 15, 2006, Verizon Wireless’ six year 5.375% fixed rate note of $2.5 billion matured. At December 31, 2006, Verizon Wireless had no third-party debt out- standing. On January 8, 2007, we redeemed the remaining $1,580 million of the outstanding notes of the Verizon Communications Inc. floating rate notes due 2007. The gain/(loss) on these redemptions and prepayments were immaterial. Issuance of Debt In February 2006, Verizon issued $4,000 million of floating rate and fixed rate notes maturing from 2007 through 2035. Spectrum Purchases On November 29, 2006, we were granted thirteen 20 MHz licenses we won in an FCC auction of Advanced Wireless Services spectrum that concluded on September 18, 2006, for which we had bid a total of $2,809 million. These licenses, which we anticipate using for the provision of advanced wireless broadband services, cover a popula- tion of nearly 200 million. We have made all required payments to the FCC for these licenses. Environmental Matters During 2003, under a government-approved plan, remediation com- menced at the site of a former Sylvania facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was con- ducted. A reassessment of costs related to remediation efforts at several other former facilities was also undertaken. In September 2005, the Army Corps of Engineers (ACE) accepted the Hicksville site into the Formerly Utilized Sites Remedial Action Program. This may result in the ACE performing some or all of the remediation effort for the Hicksville site with a corresponding decrease in costs to Verizon. To the extent that the ACE assumes responsibility for remedial work at the Hicksville site, an adjustment to a reserve pre- viously established for the remediation may be made. Adjustments may also be made based upon actual conditions discovered during the remediation at any of the sites requiring remediation. 35 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued New York Recovery Funding In August 2002, President Bush signed the Supplemental Appropriations bill that included $5.5 billion in New York recovery funding. Of that amount, approximately $750 million has been allo- cated to cover utility restoration and infrastructure rebuilding as a result of the September 11th terrorist attacks on lower Manhattan. These funds will be distributed through the Lower Manhattan Development Corporation following an application and audit process. As of September 2004, we had applied for reimbursement of approximately $266 million under Category One, although we did not record this amount as a receivable. We received advances totaling $88 million in connection with this application process. On December 22, 2004, we applied for reimbursement of an additional $136 million of Category Two losses, and on March 29, 2005 we amended our application seeking an additional $3 million. Category Two funding is for permanent restoration and infrastructure improve- ment. According to the plan, permanent restoration is reimbursed up to 75% of the loss. On November 3, 2005, we received the results of preliminary audit findings disallowing all but $44 million of our $266 million of Category One application. On December 8, 2005, we pro- vided a detailed rebuttal to the preliminary audit findings. We received a copy of the final audit report for Verizon’s Category One applications and, on January 4, 2007, we filed an appeal of the final audit report. That appeal, as well as our Category Two applications, are pending. Regulatory and Competitive Trends Competition and Regulation Technological, regulatory and market changes have provided Verizon both new opportunities and challenges. These changes have allowed Verizon to offer new types of services in this increasingly competitive market. At the same time, they have allowed other service providers to broaden the scope of their own competitive offerings. Current and potential competitors for network services include other telephone companies, cable companies, wireless service providers, foreign telecommunications providers, satellite providers, electric utilities, Internet Service Providers, providers of VoIP services, and other companies that offer network services using a variety of technologies. Many of these companies have a strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition and may affect our future revenue growth. Many of our competitors also remain subject to fewer regulatory constraints than Verizon. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our business, results of operations or financial condition. The finan- cial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of our pursuit of new opportunities. FCC Regulation Our services are subject to the jurisdiction of the FCC with respect to interstate telecommunications services and other matters for which the FCC has jurisdiction under the Communications Act of 1934, as amended (Communications Act). The Communications Act generally obligates us not to charge unjust or unreasonable rates nor engage in unreasonable discrimination when we are providing services as a common carrier, and regulates some of the rates, terms and condi- tions under which we provide certain services. The FCC also has adopted regulations governing various aspects of our business, such as the following: (i) use and disclosure of customer proprietary net- 36 work information; (ii) telemarketing; (iii) assignment of telephone num- bers to customers; (iv) provision to law enforcement agencies of the capability to obtain call identifying information and call content infor- mation from calls pursuant to lawful process; (v) accessibility of services and equipment to individuals with disabilities if readily achievable; (vi) interconnection with the networks of other carriers; and (vii) customers’ ability to keep (or “port”) their telephone numbers when switching to another carrier. In addition, we pay various fees to support other FCC programs, such as the universal service program discussed below. Changes to these mandates, or the adoption of additional mandates, could require us to make changes to our opera- tions or otherwise increase our costs of compliance. Broadband The FCC has adopted a series of orders that recognize the competitive nature of the broadband market, and impose lesser regulatory require- ments on broadband services and facilities than apply to narrowband. With respect to facilities, the FCC has determined that certain unbundling requirements that apply to narrowband facilities do not apply to broadband facilities such as fiber to the premise loops and packet switches. With respect to services, the FCC has concluded that broadband Internet access services offered by telephone companies and their affiliates qualify as largely deregulated information services. The same order also concluded that telephone companies may offer the underlying broadband transmission services that are used as an input to Internet access services through private carriage arrange- ments on negotiated commercial terms. In addition, a Verizon petition asking the FCC to forbear from applying common carrier regulation to certain broadband services sold primarily to larger business customers when those services are not used for Internet access was deemed granted by operation of law on March 19, 2006 when the FCC did not deny the petition by the statutory deadline. Both the FCC’s order addressing the appropriate regulatory treatment of broadband Internet access services and the relief obtained through the forbearance peti- tion are the subject of pending appeals. Video The FCC has a body of rules that apply to cable operators under Title VI of the Communications Act, and these rules also generally apply to telephone companies that provide cable services over their networks. In addition, companies that provide cable service over a cable system generally must obtain a local cable franchise. On December 21, 2006, the FCC announced the adoption of rules under Section 621 of the Communications Act to set parameters consis- tent with federal law, on the timing and scope of franchise negotiations by local franchising authorities. Interstate Access Charges and Intercarrier Compensation The current framework for interstate access rates was established in the Coalition for Affordable Local and Long Distance Services (CALLS) plan, which the FCC adopted on May 31, 2000. The CALLS plan has three main components. First, it establishes portable inter- state access universal service support of $650 million for the industry that replaces implicit support previously embedded in inter- state access charges. Second, the plan simplifies the patchwork of common line charges into one subscriber line charge (SLC) and pro- vides for de-averaging of the SLC by zones and class of customers. Third, the plan set into place a mechanism to transition to a set target of $.0055 per minute for switched access services. Once that target rate is reached, local exchange carriers are no longer required to make further annual price cap reductions to their switched access prices. As a result of tariff adjustments which became effective in July 2003, virtually all of our switched access lines reached the $.0055 benchmark. Management’s Discussion and Analysis of Results of Operations and Financial Condition continued The FCC currently is conducting a broad rulemaking proceeding to consider new rules governing intercarrier compensation including, but not limited to, access charges, compensation for Internet traffic, and reciprocal compensation for local traffic. The FCC has sought comments about intercarrier compensation in general, and has requested input on several specific reform proposals. The FCC also has pending before it issues relating to intercarrier com- pensation for dial-up Internet-bound traffic. The FCC previously found that this traffic is not subject to reciprocal compensation under Section 251(b)(5) of the Telecommunications Act of 1996. Instead, the FCC established federal rates per minute for this traffic that declined from $.0015 to $.0007 over a three-year period, established caps on the total minutes of this traffic subject to compensation in a state, and required incumbent local exchange carriers to offer to both bill and pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. The U.S. Court of Appeals for the D.C. Circuit rejected part of the FCC’s rationale, but declined to vacate the order while it is on remand. As a result, pending further action by the FCC, the FCC’s underlying order remains in effect. The FCC subsequently denied a petition to discontinue the $.0007 rate cap on this traffic, but removed the caps on the total min- utes of Internet-bound traffic subject to compensation. That decision has been upheld on appeal. Disputes also remain pending in a number of forums relating to the appropriate compensation for Internet-bound traffic during previous periods under the terms of our interconnection agreements with other carriers. The FCC also is conducting a rulemaking proceeding to address the regulation of services that use Internet protocol, including whether access charges should apply to voice or other Internet protocol services. The FCC also considered several petitions asking whether, and under what circumstances, services that employ Internet pro- tocol are subject to access charges. The FCC previously has held that one provider’s peer-to-peer Internet protocol service that does not use the public switched network is an interstate information service and is not subject to access charges, while a service that uti- lizes Internet protocol for only one intermediate part of a call’s transmission is a telecommunications service that is subject to access charges. Another petition asking the FCC to forbear from applying access charges to voice over Internet protocol services that are terminated on switched local exchange networks was with- drawn by the carrier that filed that petition. The FCC also declared the services offered by one provider of a voice over Internet protocol service to be jurisdictionally interstate on the grounds that it was impossible to separate that carrier’s Internet protocol service into interstate and intrastate components. The FCC also stated that its conclusion would apply to other services with similar characteristics. That order has been appealed. The FCC also has adopted rules for special access services that pro- vide for pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. More than half of special access revenues are now removed from price regulation. The FCC currently has a rulemaking proceeding underway to evaluate experience under its pricing flexibility rules, and to determine whether any changes to those rules are warranted. Universal Service The FCC also has a body of rules implementing the universal service provisions of the Telecommunications Act of 1996, including rules governing support to rural and non-rural high-cost areas, support for low income subscribers, and support for schools, libraries and rural health care. The FCC’s current rules for support to high-cost areas served by larger “non-rural” local telephone companies were previ- ously remanded by U.S. Court of Appeals for the Tenth Circuit, which had found that the FCC had not adequately justified these rules. The FCC has initiated a rulemaking proceeding in response to the court’s remand, but its rules remain in effect pending the results of the rule- making. The FCC also has proceedings underway to evaluate possible changes to its current rules for assessing contributions to the uni- versal service fund. As an interim step, in June 2006, the FCC ordered that providers of VoIP services are subject to federal universal service obligations. The FCC also increased the percentage of revenues sub- ject to federal universal service obligations that wireless providers may use as a safe harbor. These decisions are the subject of a pending appeal. Any further change in the current assessment mechanism could result in a change in the contribution that local telephone com- panies, wireless carriers or others must make and that would have to be collected from customers. Unbundling of Network Elements Under Section 251 of the Telecommunications Act of 1996, incum- bent local exchange carriers were required to provide competing carriers with access to components of their network on an unbundled basis, known as UNEs, where certain statutory standards are satis- fied. The Telecommunications Act of 1996 also adopted a cost-based pricing standard for these UNEs, which the FCC interpreted as allowing it to impose a pricing standard known as “total element long run incremental cost” or “TELRIC.” The FCC’s rules defining the unbundled network elements that must be made available at TELRIC prices have been overturned on multiple occasions by the courts. In its most recent order issued in response to these court decisions, the FCC eliminated the requirement to unbundle mass market local switching on a nationwide basis, with the obligation to accept new orders ending as of the effective date of the order (March 11, 2005). The FCC also established a one year transition for existing UNE switching arrangements. For high capacity transmission facilities, the FCC established criteria for determining whether high capacity loops, transport or dark fiber transport must be unbundled in individual wire centers, and stated that these standards were only expected to affect a small number of wire centers. The FCC also eliminated the obliga- tion to provide dark fiber loops and found that there is no obligation to provide UNEs exclusively for wireless or long distance service. In any instance where a particular high capacity facility no longer has to be made available as a UNE, the FCC established a similar one year transition for any existing high capacity loop or transport UNEs, and an 18 month transition for any existing dark fiber UNEs. This decision has been upheld on appeal. As noted above, the FCC has concluded that the requirement under Section 251 of the Telecommunications Act of 1996 to provide unbun- dled network elements at TELRIC prices generally does not apply with respect to broadband facilities, such as fiber to the premises loops, the packet-switched capabilities of hybrid loops and packet switching. The FCC also has held that any separate unbundling obli- the gations Telecommunications Act of 1996 do not apply to these same facilities. The decision with respect to Section 271 has been upheld on appeal and a petition for rehearing of that appellate order was denied. imposed by Section 271 of that may be Wireless Services The FCC regulates the licensing, construction, operation, acquisition and transfer of wireless communications systems, including the sys- tems that Verizon Wireless operates, pursuant to the Communications Act, other legislation, and the FCC’s rules. The FCC and Congress continuously consider changes to these laws and rules. Adoption of new laws or rules may raise the cost of providing service or require modification of Verizon Wireless’s business plans or operations. 37 Management’s Discussion and Analysis of Results of Operations and Financial Condition continued To use the radio frequency spectrum, wireless communications sys- tems must be licensed by the FCC to operate the wireless network and mobile devices in assigned spectrum segments. Verizon Wireless holds FCC licenses to operate in several different radio services, including the cellular radiotelephone service, personal communications service, advanced wireless service, and point-to-point radio service. The technical and service rules, the specific radio frequencies and amounts of spectrum we hold, and the sizes of the geographic areas we are authorized to operate in, vary for each of these services. However, all of the licenses Verizon Wireless holds allow it to use spec- trum to provide a wide range of mobile and fixed communications services, including both voice and data services, and Verizon Wireless operates a seamless network that utilizes those licenses to provide services to customers. Because the FCC issues licenses for only a fixed time, generally 10 years, Verizon Wireless must periodically seek renewal of those licenses. Although the FCC has routinely renewed all of Verizon Wireless’s licenses that have come up for renewal to date, challenges could be brought against the licenses in the future. If a wire- less license were revoked or not renewed upon expiration, Verizon Wireless would not be permitted to provide services on the licensed spectrum in the area covered by that license. The FCC has also imposed specific mandates on carriers that operate wireless communications systems, which increase Verizon Wireless’s costs. These mandates include requirements that Verizon Wireless: (i) meet specific construction and geographic coverage requirements during the license term; (ii) meet technical operating standards that, among other things, limit the radio frequency radia- tion from mobile devices and antennas; (iii) deploy “Enhanced 911” wireless services that provide the wireless caller’s number, location and other information upon request by a state or local public safety agency that handles 911 calls; and (iv) comply with regulations for the construction of transmitters and towers that, among other things, restrict siting of towers in environmentally sensitive locations and in places where the towers would affect a site listed or eligible for listing on the National Register of Historic Places. Changes to these mandates could require Verizon Wireless to make changes to operations or increase its costs of compliance. The Communications Act imposes restrictions on foreign ownership of U.S. wireless systems. The FCC has approved the interest that Vodafone Group Plc holds, through various of its subsidiaries, in Verizon Wireless. The FCC may need to approve any increase in Vodafone’s interest or the acquisition of an ownership interest by other foreign entities. In addition, as part of the FCC’s approval of Vodafone’s ownership interest, Verizon Wireless, Verizon and Vodafone entered into an agreement with the U.S. Department of Defense, Department of Justice and Federal Bureau of Investigation which imposes national security and law enforcement-related obli- gations on the ways in which Verizon Wireless stores information and otherwise conducts its business. Verizon Wireless anticipates that it will need additional spectrum to meet future demand. It can meet spectrum needs by purchasing licenses or leasing spectrum from other licensees, or by acquiring new spectrum licenses from the FCC. Under the Communications Act, before Verizon Wireless can acquire a license from another licensee in order to expand its coverage or its spectrum capacity in a particular area, it must file an application with the FCC, and the FCC can grant the application only after a period for public notice and comment. This review process can delay acquisition of spectrum needed to expand services. The Communications Act also requires the FCC to award new licenses for most commercial wireless serv- ices through a competitive bidding process in which spectrum is 38 awarded to bidders in an auction. Verizon Wireless has participated in spectrum auctions to acquire licenses in the personal communication service and most recently the advanced wireless service. However, the timing of future auctions, and the spectrum being sold, may not match Verizon Wireless’s needs, and the company may not be able to secure the spectrum in the auction. The FCC is also conducting several proceedings to explore whether and how to use spectrum more intensively by, for example, allowing unlicensed wireless devices to operate in licensed spectrum bands. These proceedings could increase radio interference to Verizon Wireless’s operations from other spectrum users, or allow other users to share its spectrum. These changes may adversely impact the ways in which it uses spectrum, the capacity of that spectrum to carry traffic, and the value of that spectrum. State Regulation and Local Approvals Telephone Operations State public utility commissions regulate our telephone operations with respect to certain telecommunications intrastate rates and serv- ices and other matters. Our competitive local exchange carrier and long distance operations are generally classified as nondominant and lightly regulated the same as other similarly situated carriers. Our incumbent local exchange operations are generally classified as dominant. These latter operations predominantly are subject to alter- native forms of regulation (AFORs) in the various states, although they remain subject to rate of return regulation in a few states. Arizona, Illinois, Nevada, New Hampshire, Oregon and Washington are rate of return regulated with various levels of pricing flexibility for competitive services. California, Connecticut, Delaware, the District of Columbia, Florida, Indiana, Maryland, Michigan, Maine, Massachusetts, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, Vermont, Virginia, West Virginia and Wisconsin are under AFORs with various levels of pricing flexibility, detariffing, and service quality standards. None of the AFORs include earnings regulation. In Idaho, Verizon has made the election under a recent statutory amendment into a deregulatory regime that phases out all price regulation. Video Companies that provide cable service over a cable system are typi- cally subject to state and/or local cable television rules and regulations. As noted above, cable operators generally must obtain a local cable franchise from each local unit of government prior to providing cable service in that local area. Some states have recently enacted legislation that enables cable operators to apply for, and obtain, a single cable franchise at the state, rather than local, level. To date, Verizon has applied for and received state-issued franchises in Indiana, New Jersey and Texas. California has enacted statewide reform legislation, but has not yet finalized implementing rules. Wireless Services The rapid growth of the wireless industry has led to an increase in efforts by some state legislatures and state public utility commissions to regulate the industry in ways that may impose additional costs on Verizon Wireless. The Communications Act generally preempts regula- tion by state and local governments of the entry of, or the rates charged by, wireless carriers. Although a state may petition the FCC to allow it to impose rate regulation, no state has done so. In addition, the Communications Act does not prohibit the states from regulating the other “terms and conditions” of wireless service. While numerous state commissions do not currently have jurisdiction over wireless services, state legislatures may decide to grant them such jurisdiction, and those commissions that already have authority to impose regula- tions on wireless carriers may adopt new rules. Management’s Discussion and Analysis of Results of Operations and Financial Condition continued State efforts to regulate wireless services have included proposals to regulate customer billing, termination of service, trial periods for service, advertising, network outages, the use of handsets while driving, and the provision of emergency or alert services. Over the past several years, only a few states have imposed regulation in one or more of these areas, and in 2006 a federal appellate court struck down one such state statute, but Verizon Wireless expects these efforts to continue. Some states also impose their own universal service support regimes on wireless and other telecommunications carriers, and other states are considering whether to create such regimes. Verizon Wireless (as well as AT&T (formerly Cingular) and Sprint- Nextel) is a party to an Assurance of Voluntary Compliance (“AVC”) with 33 State Attorneys General. The AVC, which generally reflected Verizon Wireless’s practices at the time it was entered into in July 2004, obligates the company to disclose certain rates and terms during a sales transaction, to provide maps depicting coverage, and to comply with various requirements regarding advertising, billing, and other practices. At the state and local level, wireless facilities are subject to zoning and land use regulation. Under the Communications Act, neither state nor local governments may categorically prohibit the construc- tion of wireless facilities in any community or take actions, such as indefinite moratoria, which have the effect of prohibiting service. Nonetheless, securing state and local government approvals for new tower sites has been and is likely to continue to be a difficult, lengthy and expensive process. Finally, state and local governments con- tinue to impose new or higher fees and taxes on wireless carriers. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS In this Annual Report on Form 10-K we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward- looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward- looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors, along with those discussed else- where in this Annual Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: • materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotia- tions, and any resulting financial and/or operational impact, in the markets served by us or by companies in which we have sub- stantial investments; • material changes in available technology, including disruption of our suppliers’ provisioning of critical products or services; • technology substitution; • an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; • the final results of federal and state regulatory proceedings con- cerning our provision of retail and wholesale services and judicial review of those results; • the effects of competition in our markets; • the timing, scope and financial impacts of our deployment of fiber-to-the-premises broadband technology; • the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; • changes in our accounting assumptions that regulatory agen- cies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; • the timing of the sales of our Latin American and Caribbean properties; and • the extent and timing of our ability to obtain revenue enhance- ments and cost savings following our business combination with MCI, Inc. 39 Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S We, the management of Verizon Communications Inc., are respon- sible for establishing and maintaining adequate internal control over financial reporting of the company. Management has evaluated internal control over financial reporting of the company using the criteria for effective internal control established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2006. Based on this assessment, we believe that the internal control over financial reporting of the company is effective as of December 31, 2006. In connection with this assessment, there were no material weaknesses in the company’s internal control over financial reporting identified by management. The company’s financial statements included in this annual report have been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst & Young LLP has also issued an attes- tation report on management’s assessment of the company’s internal control over financial reporting. Ivan G. Seidenberg Chairman and Chief Executive Officer Doreen A. Toben Executive Vice President and Chief Financial Officer Thomas A. Bartlett Senior Vice President and Controller To The Board of Directors and Shareowners of Verizon Communications Inc.: We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Verizon Communications Inc. and sub- sidiaries (Verizon) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Verizon’s management is responsible for maintaining effec- tive internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal con- trol over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal con- trol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we con- sidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for in accordance with generally accepted external purposes accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial state- ments in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assur- ance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 40 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projec- tions of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Verizon maintained effective internal control over financial reporting, as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Verizon maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consoli- dated balance sheets of Verizon as of December 31, 2006 and 2005, and the related consolidated statements of income, cash flows and changes in shareowners’ investment for each of the three years in the period ended December 31, 2006 of Verizon and our report dated February 23, 2007 expressed an unqualified opinion thereon. Ernst & Young LLP New York, New York February 23, 2007 Report of Independent Registered Public Accounting Firm on Financial Statements To The Board of Directors and Shareowners of Verizon Communications Inc.: We have audited the accompanying consolidated balance sheets of Verizon Communications Inc. and subsidiaries (Verizon) as of December 31, 2006 and 2005, and the related consolidated state- ments of income, cash flows and changes in shareowners’ investment for each of the three years in the period ended December 31, 2006. These financial statements are the responsi- bility of Verizon’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a rea- sonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Verizon at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Verizon changed its methods of accounting for stock-based com- pensation effective January 1, 2006 and pension and other post-retirement obligations effective December 31, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Verizon’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007 expressed an unqualified opinion thereon. Ernst & Young LLP New York, New York February 23, 2007 41 Consolidated Statements of Income Years Ended December 31, Operating Revenues Operating Expenses Cost of services and sales (exclusive of items shown below) Selling, general & administrative expense Depreciation and amortization expense Sales of businesses, net Total Operating Expenses Operating Income Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Income Before Provision for Income Taxes, Discontinued Operations and Cumulative Effect of Accounting Change Provision for income taxes Income Before Discontinued Operations and Cumulative Effect of Accounting Change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net Income Basic Earnings Per Common Share(1) Income before discontinued operations and cumulative effect of accounting change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net Income Weighted-average shares outstanding (in millions) Diluted Earnings Per Common Share(1) Income before discontinued operations and cumulative effect of accounting change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net Income Weighted-average shares outstanding (in millions) (1) Total per share amounts may not add due to rounding. See Notes to Consolidated Financial Statements. V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S 2006 (dollars in millions, except per share amounts) 2004 2005 $ 88,144 $ 69,518 $ 65,751 34,994 25,232 14,545 – 74,771 13,373 773 395 (2,349) (4,038) 8,154 (2,674) 5,480 759 (42) 6,197 1.88 .26 (.01) 2.13 2,912 1.88 .26 (.01) 2.12 2,938 $ $ $ $ $ 24,200 19,652 13,615 (530) 56,937 12,581 686 311 (2,129) (3,001) 8,448 (2,421) 6,027 1,370 – 7,397 2.18 .50 – 2.67 2,766 2.16 .49 – 2.65 2,817 $ $ $ $ $ 22,032 19,346 13,503 – 54,881 10,870 1,690 82 (2,336) (2,329) 7,977 (2,078) 5,899 1,932 – 7,831 2.13 .70 – 2.83 2,770 2.11 .68 – 2.79 2,831 $ $ $ $ $ 42 Consolidated Balance Sheets At December 31, Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $1,139 and $1,100 Inventories Assets held for sale Prepaid expenses and other Total current assets Plant, property and equipment Less accumulated depreciation Investments in unconsolidated businesses Wireless licenses Goodwill Other intangible assets, net Other assets Total assets Liabilities and Shareowners’ Investment Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Liabilities related to assets held for sale Other Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Shareowners’ investment Series preferred stock ($.10 par value; none issued) Common stock ($.10 par value; 2,967,652,438 shares and 2,774,865,381 shares issued) Contributed capital Reinvested earnings Accumulated other comprehensive loss Common stock in treasury, at cost Deferred compensation-employee stock ownership plans and other Total shareowners’ investment Total liabilities and shareowners’ investment See Notes to Consolidated Financial Statements. V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S (dollars in millions, except per share amounts) 2005 2006 $ 3,219 2,434 10,891 1,514 2,592 1,888 22,538 204,109 121,753 82,356 4,868 50,959 5,655 5,140 17,288 $ 188,804 $ 7,715 14,320 2,154 8,091 32,280 28,646 30,779 16,270 3,957 28,337 – 297 40,124 17,324 (7,530) (1,871) 191 48,535 $ 188,804 $ 760 2,146 8,534 1,522 4,233 2,125 19,320 187,761 114,774 72,987 4,602 47,781 315 4,068 19,057 $ 168,130 $ 6,688 11,747 2,870 5,395 26,700 31,569 17,693 22,831 3,224 26,433 – 277 25,369 15,905 (1,783) (353) 265 39,680 $ 168,130 43 Consolidated Statements of Cash Flows Years Ended December 31, 2006 2005 (dollars in millions) 2004 V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S $ 6,197 $ 7,397 $ 7,831 Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense Sales of businesses, net (Gain) loss on sale of discontinued operations Employee retirement benefits Deferred income taxes Provision for uncollectible accounts Equity in earnings of unconsolidated businesses Cumulative effect of accounting change, net of tax Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses: Accounts receivable Inventories Other assets Accounts payable and accrued liabilities Other, net Net cash provided by operating activities – continuing operations Net cash provided by operating activities – discontinued operations Net cash provided by operating activities Cash Flows from Investing Activities Capital expenditures (including capitalized software) Acquisitions, net of cash acquired, and investments Proceeds from disposition of businesses Net change in short-term and other current investments Other, net Net cash used in investing activities – continuing operations Net cash provided by (used in) investing activities – discontinued operations Net cash used in investing activities Cash Flows from Financing Activities Proceeds from long-term borrowings Repayments of long-term borrowings and capital lease obligations Increase (decrease) in short-term obligations, excluding current maturities Dividends paid Proceeds from sale of common stock Purchase of common stock for treasury Other, net Net cash used in financing activities – continuing operations Net cash used in financing activities – discontinued operations Net cash used in financing activities 14,545 – 541 1,923 (252) 1,034 (773) 42 (1,312) 8 52 (383) 1,408 23,030 1,076 24,106 (17,101) (1,422) – 290 811 (17,422) 1,806 (15,616) 3,983 (11,233) 7,944 (4,719) 174 (1,700) (201) (5,752) (279) (6,031) Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2,459 760 3,219 $ $ 44 13,615 (530) – 1,695 (1,093) 1,076 (686) – (788) (236) (176) (899) 1,069 20,444 1,581 22,025 (14,964) (4,684) 1,326 (346) 532 (18,136) (356) (18,492) 1,487 (3,825) 2,098 (4,427) 37 (271) (57) (4,958) (76) (5,034) (1,501) 2,261 760 13,503 – – 1,836 1,721 890 (1,690) – (1,293) (226) 539 (1,820) (1,115) 20,176 1,615 21,791 (12,794) (1,196) 117 (90) 2,474 (11,489) 1,146 (10,343) 514 (5,168) (747) (4,262) 320 (370) (125) (9,838) (18) (9,856) 1,592 669 2,261 $ Consolidated Statements of Changes in Shareowners’ Investment V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S Years Ended December 31, Common Stock Balance at beginning of year Shares issued Employee plans Shareowner plans Shares issued MCI/Price acquisitions Balance at end of year Contributed Capital Balance at beginning of year Shares issued-employee and shareowner plans Shares issued-MCI/Price acquisitions Net tax benefit from employee stock compensation Idearc Inc. spin-off Other Balance at end of year Reinvested Earnings Balance at beginning of year Net income Dividends declared ($1.62, $1.62 and $1.54 per share) Other Balance at end of year Accumulated Other Comprehensive Loss Balance at beginning of year Foreign currency translation adjustment Unrealized gains on net investment hedges Unrealized gains (losses) on marketable securities Unrealized gains on cash flow hedges Minimum pension liability adjustment Adoption of SFAS No. 158 Other Other comprehensive income (loss) Balance at end of year Treasury Stock Balance at beginning of year Shares purchased Shares distributed Employee plans Shareowner plans Balance at end of year Deferred Compensation–ESOPs and Other Balance at beginning of year Amortization Other Balance at end of year Total Shareowners’ Investment Comprehensive Income Net income Other comprehensive income (loss) per above Total Comprehensive Income (Loss) See Notes to Consolidated Financial Statements. Shares 2006 Amount (dollars in millions, except per share amounts, and shares in thousands) 2004 Amount 2005 Amount Shares Shares 2,774,865 $ 277 2,774,865 $ 277 2,772,314 $ 277 – – 192,787 2,967,652 – – 20 297 – – – 2,774,865 – – – 277 2,501 50 – 2,774,865 25,369 – 6,009 (2) 8,695 53 40,124 15,905 6,197 (4,781) 3 17,324 (1,783) 1,196 – 54 14 788 (7,671) (128) (5,747) (7,530) (353) (1,700) 181 1 (1,871) 265 (74) – 191 $ 48,535 $ 6,197 (5,747) 450 $ 25,404 (24) – – – (11) 25,369 12,984 7,397 (4,479) 3 15,905 (1,053) (755) 2 (21) 10 51 – (17) (730) (1,783) (142) (271) 59 1 (353) 90 174 1 265 $ 39,680 $ 7,397 (730) $ 6,667 (5,213) (7,859) 1,594 22 (11,456) (11,456) (50,066) 5,355 20 (56,147) (4,554) (9,540) 8,881 – (5,213) – – – 277 25,363 2 – 41 – (2) 25,404 9,409 7,831 (4,265) 9 12,984 (1,250) 548 – 7 17 (332) – (43) 197 (1,053) (115) (370) 343 – (142) (218) 301 7 90 $ 37,560 $ 7,831 197 $ 8,028 45 Notes to Consolidated Financial Statements NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Verizon Communications Inc. (Verizon) is one of the world’s leading providers of communications services. Our wireline business pro- vides telephone services, including voice, broadband video and data, network access, nationwide long-distance and other communica- tions products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. We continue to deploy advanced broadband network technology, with our fiber-to-the-premises network (FiOS) creating a platform with sufficient bandwidth and capabilities to meet customers’ current and future needs. FiOS allows Verizon to offer our customers a wide array of broadband services including advanced data and television offer- ings. Our IP network includes over 446,000 route miles of fiber optic cable and provides access to over 150 countries across six conti- nents, enabling us to provide next-generation IP network products and Information Technology (IT) services to medium and large busi- nesses and government customers worldwide. Verizon’s domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and other value added services and equipment across the United States using one of the most extensive wireless networks. Verizon Wireless continues to expand our wireless data, messaging and multi-media offerings for both consumer and business customers. NationalAccess is our national wireless Internet service that offers customers access to the internet, email and business applications with a laptop com- puter. VCAST is a consumer wireless broadband multimedia service that brings high-quality video, 3D games and music to a wide array of new phones. We have two reportable segments, Wireline and Domestic Wireless, which we operate and manage as strategic business units and organize by products and services. For further information con- cerning our business segments, see Note 17. Consolidation The method of accounting applied to investments, whether consol- idated, equity or cost, involves an evaluation of all significant terms of the investments that explicitly grant or suggest evidence of con- trol or influence over the operations of the investee. The consolidated financial statements include our controlled sub- sidiaries. Investments in businesses which we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Investments in which we do not have the ability to exercise signifi- cant influence over operating and financial policies are accounted for under the cost method. Equity and cost method investments are included in Investments in Unconsolidated Businesses in our con- solidated balance sheets. Certain of our cost method investments are classified as available-for-sale securities and adjusted to fair value pursuant to the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. All significant intercompany accounts and transactions have been eliminated. We have reclassified prior year amounts to conform to the current year presentation. 46 V E R I Z O N C O M M U N I C AT I O N S I N C . A N D S U B S I D I A R I E S Discontinued Operations, Assets Held for Sale, and Sales of Businesses and Investments We classify as discontinued operations for all periods presented any component of our business that we hold for sale or dispose of that has operations and cash flows that are clearly distinguishable operationally and for financial reporting purposes from the rest of Verizon. For those components, Verizon has no significant contin- uing involvement after disposal and their operations and cash flows are eliminated from Verizon’s ongoing operations. Sales of signifi- cant components of our business not classified as discontinued operations are reported as either Sales of Businesses, Net, Equity in Earnings of Unconsolidated Businesses or Other Income and (Expense), Net in our consolidated statements of income. Use of Estimates We prepare our financial statements using generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and dis- closures. Actual results could differ from those estimates. Examples of significant estimates include the allowance for doubtful accounts, the recoverability of plant, property and equipment, intan- gible assets and other long-lived assets, valuation allowances on tax assets and pension and postretirement benefit assumptions. Revenue Recognition Wireline Our Wireline segment earns revenue based upon usage of our net- work and facilities and contract fees. In general, fixed monthly fees for local telephone, long distance and certain other services are billed one month in advance and recognized the following month when earned. Revenue from services that are not fixed in amount and are based on usage are recognized when such services are provided. We recognize equipment revenue for services, in which we bundle the equipment with maintenance and monitoring services, when the equipment is installed in accordance with contractual specifications and ready for the customer’s use. The maintenance and monitoring services are recognized monthly over the term of the contract as we provide the services. Long-term contracts are accounted for using the percentage of completion method. We use the completed con- tract method if we cannot estimate the costs with a reasonable degree of reliability. Customer activation fees, along with the related costs up to but not exceeding the activation fees, are deferred and amortized over the customer relationship period. Domestic Wireless Our Domestic Wireless segment earns revenue by providing access to and usage of our network, which includes roaming revenue. In gen- eral, access revenue is billed one month in advance and recognized when earned. Access revenue, usage revenue and roaming revenue are recognized when service is rendered. Equipment sales revenue associated with the sale of wireless handsets and accessories is rec- ognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. Customer activation fees are con- sidered additional consideration when handsets are sold to customers at a discount and are recorded as equipment sales revenue. Maintenance and Repairs We charge the cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, prin- cipally to Cost of Services and Sales as these costs are incurred. Notes to Consolidated Financial Statements continued Earnings Per Common Share Basic earnings per common share are based on the weighted- average number of shares outstanding during the period. Diluted earnings per common share include the dilutive effect of shares issuable under our stock-based compensation plans, an exchange- able equity interest (see Note 9), and the zero-coupon convertible notes (see Note 11), which represent the only potentially dilutive common shares. As of December 31, 2006, the exchangeable equity interest and zero-coupon convertible notes are no longer outstanding. Cash and Cash Equivalents We consider all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents, except cash equiv- alents held as short-term investments. Cash equivalents are stated at cost, which approximates market value. Short-Term Investments Our short-term investments consist primarily of cash equivalents held in trust to pay for certain employee benefits. Short-term invest- ments are stated at cost, which approximates market value. Marketable Securities We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for the loss, and a new cost basis in the investment is established. These investments are included in the accompanying consolidated balance sheets in Investments in Unconsolidated Businesses or Other Assets. When we replace or retire depreciable plant used in our local tele- phone network, we deduct the carrying amount of such plant from the respective accounts and charge it to accumulated depreciation. Plant, property and equipment of our other subsidiaries are gener- ally depreciated on a straight-line basis over the following estimated useful lives: buildings, 8 to 40 years; plant equipment, 3 to 15 years; and other equipment, 3 to 5 years. When the depreciable assets of our other subsidiaries are retired or otherwise disposed of, the related cost and accumulated deprecia- tion are deducted from the plant accounts, and any gains or losses on disposition are recognized in income. We capitalize network software purchased or developed along with related plant assets. We also capitalize interest associated with the acquisition or construction of network-related assets. Capitalized interest is reported as part of the cost of the network-related assets and as a reduction in interest expense. In connection with our ongoing review of the estimated remaining useful lives of plant, property and equipment and associated depre- ciation rates, we determined that, effective January 1, 2005, the remaining useful lives of three categories of telephone assets would be shortened by 1 to 2 years. These changes in asset lives were based on Verizon’s plans, and progress to date on those plans, to deploy fiber optic cable to homes, replacing copper cable. While the timing and extent of current deployment plans are subject to modification, Verizon management believes that current estimates of reductions in impacted asset lives is reasonable and subject to ongoing analysis as deployment of fiber optic lines continues. The asset categories impacted and useful life changes are as follows: Inventories We include in inventory new and reusable supplies and network equipment of our local telephone operations, which are stated prin- cipally at average original cost, except that specific costs are used in the case of large individual items. Inventories of our other sub- sidiaries are stated at the lower of cost (determined principally on either an average cost or first-in, first-out basis) or market. Average Lives (in years) Central office equipment Digital switches Circuit equipment Outside plant Copper cable From 12 9 To 11 8-9 15-19 13-18 Plant and Depreciation We record plant, property and equipment at cost. Our local tele- phone operations’ depreciation expense is principally based on the composite group remaining life method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. This method requires the periodic revision of depreciation rates. The asset lives used by our Wireline operations are presented in the following table: Average Lives (in years) Buildings Central office equipment Outside communications plant Copper cable Fiber cable Microwave towers Poles and conduit Furniture, vehicles and other 15-42 5-11 13-18 11-20 30 30-50 3-20 In connection with our ongoing review noted above, we determined that, effective January 1, 2006, the remaining useful lives of circuit equipment would be shortened from 8-9 years to 8 years. Computer Software Costs We capitalize the cost of internal-use network and non-network software which has a useful life in excess of one year in accordance with Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Subsequent additions, modifications or upgrades to internal- use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. Also, we capi- talize interest associated with the development of non-network internal-use software. Capitalized non-network internal-use soft- ware costs are amortized using the straight-line method over a period of 1 to 7 years and are included in Other Intangible Assets, Net in our consolidated balance sheets. For a discussion of our impairment policy for capitalized software costs under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, see “Goodwill and Other Intangibles” below. Also, see Note 7 for additional detail of non-network internal-use software reflected in our consolidated balance sheets. 47 Notes to Consolidated Financial Statements continued Goodwill and Other Intangible Assets Goodwill Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually, and more frequently if indications of impairment exist. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. We have determined that, in our case, the reporting units are our operating segments since that is the lowest level at which dis- crete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment. Intangible Assets Not Subject to Amortization A significant portion of our intangible assets are Domestic Wireless licenses that provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cel- lular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, con- tractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). We reevaluate the useful life determination for wireless licenses each reporting period to determine whether events and cir- cumstances continue to support an indefinite useful life. We test our Domestic Wireless licenses for impairment annually, and more frequently if indications of impairment exist. Beginning in 2005, we began using a direct value approach in performing our annual impairment test on our Domestic Wireless licenses. The direct value approach determines fair value using estimates of future cash flows associated specifically with the licenses. Previously, we used a residual method, which determined the fair value of the wireless licenses by subtracting from the fair value of the wireless business the fair value of all of the other net tangible and intangible (primarily recognized and unrecognized customer relationship intangible assets) assets of our wireless operations. We began using the direct value approach in 2005 in accordance with a September 29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), “Use of the Residual Method to Value Acquired Assets Other Than Goodwill.” Under either the direct method or the residual method, if the fair value of the aggregated wireless licenses is less than the aggregated car- rying amount of the licenses, an impairment is recognized. Intangible Assets Subject to Amortization Our intangible assets that do not have indefinite lives (primarily cus- tomer lists and non-network internal-use software) are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recover- able. If any indications were present, we would test for 48 recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed the car- rying amount (i.e., the asset is not recoverable), we would perform the next step which is to determine the fair value of the asset and record an impairment, if any. We reevaluate the useful life determi- nation for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful life. For information related to the carrying amount of goodwill by seg- ment as well as the major components and average useful lives of our other acquired intangible assets, see Note 7. Income Taxes Verizon and its domestic subsidiaries file a consolidated federal income tax return. Stock-Based Compensation Effective January 1, 2006, we adopted SFAS No. 123(R), Share- Based Payment utilizing the modified prospective method. SFAS No. 123(R) requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. The impact to Verizon primarily resulted from Verizon Wireless, for which we recorded a $42 million cumulative effect of accounting change as of January 1, 2006, net of taxes and after minority interest, to recognize the effect of initially measuring the outstanding liability for Value Appreciation Rights (VARs) granted to Domestic Wireless employees at fair value utilizing a Black-Scholes model. We have been expensing stock options since adopting SFAS No. 123, Accounting for Stock-Based Compensation effective January 1, 2003. Foreign Currency Translation The functional currency for all of our foreign operations is generally the local currency. For these foreign entities, we translate income statement amounts at average exchange rates for the period, and we translate assets and liabilities at end-of-period exchange rates. We record these translation adjustments in Accumulated Other Comprehensive Loss, a separate component of Shareowners’ Investment, in our consolidated balance sheets. We report exchange gains and losses on intercompany foreign currency trans- actions of a long-term nature in Accumulated Other Comprehensive Loss. Other exchange gains and losses are reported in income. Employee Benefit Plans Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obli- gations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. As of July 1, 2006, Verizon management employees no longer earn pension benefits or earn service towards the company retiree med- ical subsidy (See Note 15). In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires the recognition of a defined benefit postretirement plan’s funded status as either an asset or liability on the balance sheet. SFAS No. 158 also requires Notes to Consolidated Financial Statements continued the immediate recognition of the unrecognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of other accumulated comprehensive income, net of applicable income taxes. Additionally, the fair value of plan assets must be determined as of the company’s year-end. We adopted SFAS No. 158 effective December 31, 2006, which resulted in a net decrease to shareowners’ investment of $6,883 million (see Note 15). Derivative Instruments We have entered into derivative transactions to manage our expo- sure to fluctuations in foreign currency exchange rates, interest rates and equity prices. We employ risk management strategies using a variety of derivatives including foreign currency forwards and collars, equity options, interest rate swap agreements and interest rate locks. We do not hold derivatives for trading purposes. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and related amendments and interpretations, we measure all derivatives, including derivatives embedded in other financial instruments, at fair value and recognize them as either assets or liabilities on our consolidated balance sheets. Changes in the fair values of deriva- tive instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effec- tive portions of cash flow hedges are reported in other comprehensive income (loss) and recognized in earnings when the hedged item is recognized in earnings. Other Recent Accounting Pronouncements Uncertainty in Income Taxes In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. We are required to adopt FIN 48 effective January 1, 2007. The cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings (or to goodwill, in certain cases for a prior acquisi- tion) in the year of adoption and will be presented separately. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized upon adoption of FIN 48. We anticipate that as a result of the adoption of FIN 48, we will record an adjustment to our opening retained earnings. We are also reviewing the potential impact of FIN 48 on prior purchase accounting. Any such purchase accounting adjustment will not impact retained earn- ings or current earnings. We are reviewing the final impact of the adoption of FIN 48. We anticipate that any required adjustment under the adoption of FIN 48 will not be material. Leveraged Leases In July 2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2). FSP 13-2 requires that changes in the projected timing of income tax cash flows generated by a lever- aged lease transaction be recognized as a gain or loss in the year in which change occurs. We are required to adopt FSP 13-2 effective January 1, 2007. The cumulative effect of initially adopting this FSP will be recorded as an adjustment to opening retained earnings in the year of adoption and will be presented separately. We anticipate that any required adjustment under the adoption of FSP 13-2 will not be material. Fair Value Measurements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, establishes a hierarchy that catego- rizes and prioritizes the sources to be used to estimate fair value and expands disclosures about fair value measurements. We are required to adopt SFAS No. 157 effective January 1, 2008 on a prospective basis. We are currently evaluating the impact this new standard will have on our future results of operations and financial position. NOTE 2 ACQUISITIONS Completion of Merger with MCI On February 14, 2005, Verizon announced that it agreed to acquire 100% of the outstanding common stock of MCI, Inc. (MCI) for a combination of Verizon common shares and cash. MCI was a global communications company that provided Internet, data and voice communication services to businesses and government entities throughout the world and consumers in the United States. After receiving the required state, federal and international regulatory approvals, Verizon and MCI closed the merger on January 6, 2006. On April 9, 2005, Verizon entered into a stock purchase agreement with eight entities affiliated with Carlos Slim Helú to purchase 43.4 million shares of MCI common stock for $25.72 per share in cash plus an additional cash amount of 3% per annum from April 9, 2005, until the closing of the purchase of those shares. The trans- action closed on May 17, 2005. The total cash payment was $1,121 million and the investment was accounted for as a cost investment. No payments were made under a provision that required Verizon to pay an additional amount at the end of one year to the extent that the price of Verizon’s common stock exceeded $35.52 per share. We received the special dividend of $5.60 per MCI share on these 43.4 million MCI shares, or $243 million, on October 27, 2005. Under the terms of the merger agreement, MCI shareholders received .5743 shares of Verizon common stock ($5,050 million in the aggregate) and cash of $2.738 ($779 million in the aggregate) for each of their MCI shares. The merger consideration was equal to $20.40 per MCI share, excluding the $5.60 per share special divi- dend paid by MCI to its shareholders on October 27, 2005. There was no purchase price adjustment. The merger was accounted for using the purchase method in accor- dance with the SFAS No. 141, Business Combinations (SFAS No. 141), and the aggregate transaction value was $6,890 million, con- sisting of the cash and common stock issued at closing ($5,829 million), the consideration for the shares acquired from the Carlos Slim Helú entities, net of the portion of the special dividend paid by MCI that was treated as a return of our investment ($973 million) and closing and other direct merger-related costs. The number of shares issued was based on the “Average Parent Stock Price,” as defined in the merger agreement. The consolidated financial state- ments include the results of MCI’s operations from the date of the close of the merger. 49 Notes to Consolidated Financial Statements continued Prior to the merger, there were commercial transactions between us and the former MCI entities for telecommunications services at rates comparable to similar transactions with other third parties. Subsequent to the merger, these transactions are eliminated in consolidation. used for the majority of personal property. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreci- ation or obsolescence, with specific consideration given to economic obsolescence if indicated. The following table summarizes the allocation of the cost of the merger to the assets acquired, including cash of $2,361 million, and liabilities assumed as of the close of the merger. Certain of the amounts in the following table have been revised since the initial allocation to reflect information that has since become available. Assets acquired Current assets Property, plant & equipment Intangible assets subject to amortization Customer relationships Rights of way and other Deferred income taxes and other assets Goodwill Total assets acquired Liabilities assumed Current liabilities Long-term debt Deferred income taxes and other non-current liabilities Total liabilities assumed Purchase price (dollars in millions) $ 6,001 6,453 1,162 176 1,995 5,085 $ 20,872 $ 6,093 6,169 1,720 13,982 $ 6,890 The goodwill resulting from the merger with MCI was assigned to the Wireline segment, which includes the operations of the former MCI. The customer relationships are being amortized on a straight- line basis over 3-8 years based on whether the relationship is with a consumer or a business customer since this correlates to the pat- tern in which the economic benefits are expected to be realized. In connection with the merger, we recorded $193 million of sever- ance and severance-related costs and $427 million of contract termination costs in the above allocation of the cost of the merger in accordance with the Emerging Issues Task Force Issue (EITF) No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” We paid $116 million of the severance and severance-related costs in 2006 with the remaining costs to be paid in 2007. We paid $128 million of contract termination costs in 2006 and the remaining costs will be paid over the remaining contract periods through 2009. The following table summarizes the obliga- tions recognized in connection with the MCI merger and the activity to date: Initial Allocation Other Increases Payments (dollars in millions) Ending Balance Severance costs and contract termination costs $ 459 $ 161 $ (244) $ 376 Reasons for the Merger We believe that the merger will make us a more efficient competitor in providing a broad range of communications services and will result in several significant strategic benefits to us, including the following: • Strategic Position. Following the merger, it is expected that our core strengths in communication services will be enhanced by MCI’s employee and business customer base, portfolio of advanced data and IP services and network assets. • Growth Platform. MCI’s presence in the U.S. and international enterprise sector and its long haul fiber network infrastructure are expected to provide us with a stronger platform from which we can market our products and services. • Operational Benefits. We believe that we will achieve operational benefits through, among other things, eliminating duplicative staff and information and operating systems and to a lesser extent overlapping network facilities; reducing procurement costs; using the existing networks more efficiently; reducing line support reducing general and administrative expenses; improving information systems; optimizing traffic flow; eliminating planned or potential Verizon capital expenditures for new long-haul network capability; and offering wireless capabili- ties to MCI’s customers. functions; Allocation of the Cost of the Merger In accordance with SFAS No. 141, the cost of the merger was allo- cated to the assets acquired and liabilities assumed based on their fair values as of the close of the merger, with the amounts exceeding the fair value being recorded as goodwill. The process to identify and record the fair value of assets acquired and liabilities assumed included an analysis of the acquired fixed assets, including real and personal property; various contracts, including leases, contractual commitments, and other business contracts; customer relationships; investments; and contingencies. The fair values of the assets acquired and liabilities assumed were determined using one or more of three valuation approaches: market, income and cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations. The market approach, which indicates value for a subject asset based on avail- able market pricing for comparable assets, was utilized for certain acquired real property and investments. The income approach, which indicates value for a subject asset based on the present value of cash flow projected to be generated by the asset, was used for certain intangible assets such as customer relationships, as well as for favorable/unfavorable contracts. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Projected cash flows for each asset considered multiple factors, including current revenue from existing customers; distinct analysis of expected price, volume, and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace partic- ipant; expected profit margins giving consideration to marketplace synergies; and required returns to contributory assets. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was 50 Notes to Consolidated Financial Statements continued Pro Forma Information The following unaudited pro forma consolidated results of opera- tions assume that the MCI merger was completed as of January 1 for the periods shown below: Years Ended December 31, (dollars in millions, except per share amounts) 2006 2005 Revenues Income before discontinued operations and cumulative effect of accounting change Net income $ 88,371 $ 85,739 5,480 6,197 6,724 8,176 Basic earnings per common share: Income before discontinued operations and cumulative effect of accounting change Net income Diluted earnings per common share: Income before discontinued operations and cumulative effect of accounting change Net income 1.88 2.13 1.88 2.12 2.30 2.79 2.28 2.76 The unaudited pro forma information presents the combined oper- ating results of Verizon and the former MCI, with the results prior to the acquisition date adjusted to include the pro forma impact of: the elimination of transactions between Verizon and the former MCI; the adjustment of amortization of intangible assets and depreciation of fixed assets based on the purchase price allocation; the elimination of merger expenses incurred by the former MCI; the elimination of the loss on the early redemption of MCI’s debt; the adjustment of interest expense reflecting the redemption of all of MCI’s debt and the replacement of that debt with $4 billion of new debt issued in February 2006 at Verizon’s weighted average borrowing rate; and to reflect the impact of income taxes on the pro forma adjustments utilizing Verizon’s statutory tax rate of 40%. The unaudited pro forma results for 2005 include $82 million for discontinued opera- tions that were sold by MCI during the first quarter of 2005. The unaudited pro forma results for 2005 include approximately $300 million of net tax benefits resulting from tax reserve adjustments recognized by the former MCI primarily during the third and fourth quarters of 2005, including audit settlements and other activity. The unaudited pro forma consolidated basic and diluted earnings per share for 2006 and 2005 are based on the consolidated basic and diluted weighted average shares of Verizon and the former MCI. The historical basic and diluted weighted average shares of the former MCI were converted for the actual number of shares issued upon the closing of the merger. The unaudited pro forma results are presented for illustrative pur- poses only and do not reflect the realization of potential cost savings, or any related integration costs. Certain cost savings may result from the merger; however, there can be no assurance that these cost savings will be achieved. Cost savings, if achieved, could result from, among other things, the reduction of overhead expenses, including employee levels and the elimination of dupli- cate facilities and capital expenditures. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the merger occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future. Other Acquisitions In August 2002, Verizon Wireless and Price Communications Corp. (Price) combined Price’s wireless business with a portion of Verizon Wireless. The resulting limited partnership, Verizon Wireless of the East LP (VZ East), is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited part- nership interest in the new partnership which was exchangeable into the common stock of Verizon Wireless if an initial public offering of that stock occurred, or into the common stock of Verizon on the fourth anniversary of the asset contribution date. On August 15, 2006, Verizon delivered 29.5 million shares of newly-issued Verizon common stock to Price valued at $1,007 million in exchange for Price’s limited partnership interest in VZ East. As a result of acquiring Price’s limited partnership interest, Verizon recorded goodwill of $345 million in the third quarter of 2006 attrib- utable to its Domestic Wireless segment. On November 29, 2006, we were granted thirteen 20MHz licenses we won in an FCC auction that concluded on September 18, 2006. We paid a total of $2,809 million for the licenses, which cover a population of nearly 200 million. NOTE 3 DISCONTINUED OPERATIONS AND SALES OF BUSINESSES, NET Verizon Information Services In October, 2006, we announced our intention to spin-off our domestic print and Internet yellow pages directories publishing operations, which have been organized into a newly formed com- pany known as Idearc Inc. (Idearc). On October 18, 2006, the Verizon Board of Directors declared a dividend consisting of 1 share of Idearc for each 20 shares of Verizon owned. In making its deter- mination to effect the spin-off, Verizon’s Board of Directors considered, among other things, that the spin-off may allow each company to separately focus on its core business, which may facil- itate the potential expansion and growth of Verizon and Idearc, and allow each company to determine its own capital structure. On November 17, 2006, we completed the spin-off of Idearc. Cash was paid for fractional shares. The distribution of Idearc common stock to our shareholders is considered a tax free transaction for us and for our shareowners, except for the cash payments for frac- tional shares which are generally taxable. At the time of the spin-off, the exercise price of and number of shares of Verizon common stock underlying options to purchase shares of Verizon common stock, restricted stock units (RSU’s) and performance stock units (PSU’s) were adjusted pursuant to the terms of the applicable Verizon equity incentive plans, taking into account the change in the value of Verizon common stock as a result of the spin-off. In connection with the spin-off, Verizon received approximately $2.0 billion in cash from the proceeds of loans under an Idearc term loan facility and transferred to Idearc debt obligations in the aggregate principal amount of approximately $7.1 billion thereby reducing Verizon’s outstanding debt at that time. We incurred pretax charges of approximately $117 million ($101 million after-tax), including debt retirement costs, costs associated with accumulated vesting bene- fits of Idearc employees, investment banking fees and other transaction costs related to the spin-off, which are included in dis- continued operations. 51 Notes to Consolidated Financial Statements continued amount will be reduced by the amount of the dividend. Verizon has agreed to tender its shares if the offers are commenced. The Republic has agreed to commence the offers within forty-five days assuming the satisfactory completion of its due diligence investiga- tion of CANTV. The tender offers are subject to certain conditions including that a majority of the outstanding shares are tendered to the Government and receipt of regulatory approvals. Based upon the terms of the MOU and our current investment balance in CANTV, we expect that we will record a loss on our investment in the first quarter of 2007. The ultimate amount of the loss depends on a variety of factors, including the successful completion of the tender offer and the satisfaction of other terms in the MOU. Verizon Information Services Canada During 2004, we announced our decision to sell Verizon Information Services Canada Inc. to an affiliate of Bain Capital, a global private investment firm, for $1,540 million (Cdn. $1,985 million). The sale closed during the fourth quarter of 2004 and resulted in a gain of $1,017 million ($516 million after-tax). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), we have classified the results of operation of the U.S. print and Internet yellow pages directories business, Verizon Dominicana and Verizon Information Services Canada as discontinued operations in the consolidated statements of income for all years presented through the date of the spin-off or sale. We have also classified the results of operations of TELPRI, which we continued to own at December 31, 2006, as dis- continued operations in the consolidated statements of income. Our investment in CANTV continues to be accounted for as an equity method investment in continuing operations. The assets and liabilities of the U.S print and Internet yellow pages directories business, Verizon Information Services Canada, Verizon Dominicana and TELPRI are disclosed as current assets and current liabilities held for sale in the consolidated balance sheets for all years presented through the date of their spin-off or divestiture. Additional detail related to those assets and liabilities are as follows: At December 31, Current assets Plant, property and equipment, net Other non-current assets Total assets Current liabilities Long-term debt Other non-current liabilities Total liabilities (dollars in millions) 2005 2006 $ 303 $ 995 1,436 853 $ 2,592 $ 181 575 1,398 $ 2,154 2,318 920 $ 4,233 $ 1,369 300 1,201 $ 2,870 Related to the assets and liabilities above is $241 million and $898 million included as Accumulated Other Comprehensive Loss in the condensed consolidated balance sheets as of December 31, 2006 and December 31, 2005, respectively. In connection with the spin-off, we named Idearc the exclusive offi- cial publisher of Verizon print directories of wireline listings in markets where Verizon is the current incumbent local exchange car- into other agreements that defined rier. We also entered responsibility for obligations arising before or that may arise after the spin-off, including, among others, obligations relating to Idearc employees, certain transition services and taxes. In general, the agreements governing the exchange of services between us and Idearc are for specified periods at cost-based or commercial rates. Verizon Dominicana C. por A., Telecomunicaciones de Puerto Rico, Inc. and Compañía Anónima Nacional Teléfonos de Venezuela During the second quarter of 2006, we reached definitive agree- ments to sell our interests in our Caribbean and Latin American telecommunications operations in three separate transactions to América Móvil, S.A. de C.V. (América Móvil), a wireless service provider throughout Latin America, and a company owned jointly by Teléfonos de México, S.A. de C.V. (Telmex) and América Móvil. We agreed to sell our 100 percent indirect interest in Verizon Dominicana C. por A. (Verizon Dominicana) and our 52 percent interest in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to América Móvil. An entity jointly owned by América Móvil and Telmex agreed to purchase our indirect 28.5 percent interest in Compañía Anónima Nacional Teléfonos de Venezuela (CANTV). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144) we have classified the results of operations of Verizon Dominicana and TELPRI as dis- continued operations. CANTV continues to be accounted for as an equity method investment. On December 1, 2006, we closed the sale of Verizon Dominicana. The transaction resulted in net pretax cash proceeds of $2,042 mil- lion, net of a purchase price adjustment of $373 million. The U.S. taxes that became payable and were recognized at the time the transaction closed exceeded the $30 million pretax gain resulting in an after-tax loss of $541 million. We expect to close the sale of our interest in TELPRI in 2007 sub- ject to the receipt of regulatory approvals and in accordance with the terms of the definitive agreement. We expect that the sale will result in approximately $900 million in net pretax cash proceeds. During the second quarter of 2006, we entered into a definitive agree- ment to sell our indirect 28.5% interest in CANTV to an entity jointly owned by América Móvil and Telmex for estimated pretax proceeds of $677 million. Regulatory authorities in Venezuela never commenced the formal review of that transaction and the related tender offers for the remaining equity securities of CANTV. On February 8, 2007, after two prior extensions, the parties terminated the stock purchase agreement because the parties mutually concluded that the regulatory approvals would not be granted by the Government. In January 2007, the Bolivarian Republic of Venezuela (the Republic) declared its intent to nationalize certain companies, including CANTV. On February 12, 2007, we entered into a Memorandum of Understanding (MOU) with the Republic. The MOU provides that the Republic will offer to purchase all of the equity securities of CANTV through public tender offers in Venezuela and the United States at a price equivalent to $17.85 per ADS. If the tender offers are completed, the aggregate purchase price for Verizon’s shares would be $572 million. If the 2007 dividend that has been recommended by the CANTV Board is approved by shareholders and paid prior to the closing of the tender offers, this 52 Notes to Consolidated Financial Statements continued Income from discontinued operations, net of tax presented in the consolidated statements of income included the following: Years Ended December 31, 2006 (dollars in millions) 2004 2005 Operating Revenues $ 5,077 $ 5,595 $ 5,812 Income before provision for income taxes Provision for income taxes Income on discontinued operations, 2,041 (1,282) 2,159 (789) 3,251 (1,319) net of tax $ 759 $ 1,370 $ 1,932 Verizon Hawaii Inc. During the second quarter of 2004, we entered into an agreement to sell our wireline and directory businesses in Hawaii, including Verizon Hawaii Inc. which operated approximately 700,000 switched access lines, as well as the services and assets of Verizon Long Distance, Verizon Online, Verizon Information Services and Verizon Select Services Inc. in Hawaii, to an affiliate of The Carlyle Group. This trans- action closed during the second quarter of 2005. In connection with this sale, we received net proceeds of $1,326 million and recorded a net pretax gain of $530 million ($336 million after-tax). NOTE 4 OTHER STRATEGIC ACTIONS Spin-off Transaction Charges In 2006, we recorded pretax charges of $117 million ($101 million after-tax) for costs related to the spin-off of Idearc. These costs pri- marily consisted of banking and legal fees; as well as filing fees, printing and mailing costs. There were no similar charges in 2005 and 2004. Merger Integration Costs In 2006, we recorded pretax charges of $232 million ($146 million after-tax) related to integration costs associated with the MCI acquisition that closed on January 6, 2006. These costs are prima- rily comprised of advertising and other costs related to re-branding initiatives and systems integration activities. There were no similar charges incurred in 2005 and 2004. Facility and Employee-Related Items During 2006, we recorded pretax charges of $184 million ($118 mil- lion after-tax) in connection with the continued relocation of employees and business operations to Verizon Center located in Basking Ridge, New Jersey. During 2005, we recorded a net pretax gain of $18 million ($8 million after-tax) in connection with this relo- cation of our new operations center, Verizon Center, including a pretax gain of $120 million ($72 million after-tax) related to the sale of a New York City office building, partially offset by a pretax charge of $102 million ($64 million after-tax) primarily associated with relo- cation, employee severance and related activities. There were no similar charges incurred in 2004. During 2006, we recorded net pretax severance, pension and bene- fits charges of $425 million ($258 million after-tax, including $3 million of income recorded to discontinued operations). These charges included net pretax pension settlement losses of $56 million ($26 mil- lion after-tax) related to employees that received lump-sum distributions primarily resulting from our separation plans. These charges were recorded in accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS No. 88), which requires that settlement losses be recorded once prescribed payment thresholds have been reached. Also included are pretax charges of $369 million ($228 million after-tax), for employee severance and sev- erance-related costs in connection with the involuntary separation of approximately 4,100 employees. In addition, during 2005 we recorded a charge of $59 million ($36 million after-tax) associated with employee severance costs and severance-related activities in connection with the voluntary separation program for surplus union- represented employees. During 2005, we recorded a net pretax charge of $98 million ($59 million after-tax) related to the restructuring of the Verizon manage- ment retirement benefit plans. This pretax charge was recorded in accordance with SFAS No. 88, and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) and includes the unamortized cost of prior pension enhancements of $430 million offset partially by a pretax curtailment gain of $332 million related to retiree medical benefits. In connection with this restructuring, management employees: no longer earn pen- sion benefits or earn service towards the company retiree medical subsidy after June 30, 2006; received an 18-month enhancement of the value of their pension and retiree medical subsidy; and will receive a higher savings plan matching contribution. During 2004, we recorded pretax pension settlement losses of $805 million ($492 million after-tax) related to employees that received lump-sum distributions during 2004 in connection with the volun- tary separation plan under which more than 21,000 employees accepted the separation offer in the fourth quarter of 2003. These charges were recorded in accordance with SFAS No. 88. In addi- tion, we recorded a $7 million after-tax charge in income from discontinued operations, related to the 2003 separation plan. Tax Matters During 2005, we recorded a tax benefit of $336 million in connec- tion with capital gains and prior year investment losses. As a result of the capital gain realized in 2005 in connection with the sale of our Hawaii businesses, we recorded a tax benefit of $242 million related to capital losses incurred in previous years. The investment losses pertain to Iusacell, CTI Holdings, S.A. (CTI) and TelecomAsia. Also during 2005, we recorded a net tax provision of $206 million related to the repatriation of foreign earnings under the provisions of the American Jobs Creation Act of 2004, for two of our foreign investments. As a result of the capital gain realized in 2004 in connection with the sale of Verizon Information Services Canada, we recorded tax ben- efits of $234 million in the fourth quarter of 2004 pertaining to prior year investment impairments. The investment impairments primarily related to debt and equity investments in CTI, Cable & Wireless plc and NTL Incorporated. Other Charges and Special Items During 2006, we recorded pretax charges of $26 million ($16 million after-tax) resulting from the extinguishment of debt assumed in connection with the completion of the MCI merger. During 2006, we recorded after-tax charges of $42 million to recog- nize the adoption of SFAS No. 123 (R). During 2005, we recorded pretax charges of $139 million ($133 mil- lion after-tax) including a pretax impairment charge of $125 million pertaining to aircraft leased to airlines involved in bankruptcy pro- ceedings and a pretax charge of $14 million ($8 million after-tax) in connection with the early extinguishment of debt. 53 Notes to Consolidated Financial Statements continued Our investments in marketable securities are primarily bonds and mutual funds. During 2004, we sold all of our investment in Iowa Telecom pre- ferred stock, which resulted in a pretax gain of $43 million ($43 million after-tax) included in Other Income and Expense, Net in the consolidated statements of income. The preferred stock was received in 2000 in connection with the sale of access lines in Iowa. Certain other investments in securities that we hold are not adjusted to market values because those values are not readily determinable and/or the securities are not marketable. We have, however, adjusted the carrying values of these securities in situa- tions where we believe declines in value below cost were other than temporary. The carrying values for investments not adjusted to market value were $12 million at December 31, 2006 and $5 million at December 31, 2005. NOTE 6 PLANT, PROPERTY AND EQUIPMENT The following table displays the details of plant, property and equipment, which is stated at cost: At December 31, Land Buildings and equipment Network equipment Furniture, office and data processing equipment Work in progress Leasehold improvements Other Accumulated depreciation Total (dollars in millions) 2005 2006 $ 959 19,207 163,580 $ 706 16,312 152,409 12,789 2,315 3,061 2,198 204,109 (121,753) 82,356 $ 12,272 1,475 2,297 2,290 187,761 (114,774) 72,987 $ In the second quarter of 2004, we recorded an expense credit of $204 million ($123 million after-tax) resulting from the favorable resolution of pre-bankruptcy amounts due from MCI that were recovered upon the emergence of MCI from bankruptcy. Also during 2004, we recorded an impairment charge of $113 million ($87 million after-tax) related to our international long dis- tance and data network. In addition, we recorded pretax charges of $55 million ($34 million after-tax) in connection with the early extin- guishment of debt. During 2004, we recorded a pretax gain of $787 million ($565 million after-tax) on the sale of our 20.5% interest in TELUS in an under- written public offering in the U.S. and Canada. In connection with this sale transaction, Verizon recorded a contribution of $100 million to Verizon Foundation to fund its charitable activities and increase its self-sufficiency. Consequently, we recorded a net gain of $500 million after taxes related to this transaction and the accrual of the Verizon Foundation contribution. NOTE 5 MARKETABLE SECURITIES AND OTHER INVESTMENTS We have investments in marketable securities which are considered “available-for-sale” under SFAS No. 115. These investments have been included in our consolidated balance sheets in Short- Term Investments, Investments in Unconsolidated Businesses and Other Assets. Under SFAS No. 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) that are considered temporary in nature recorded in Accumulated Other Comprehensive Loss. The fair values of our investments in marketable securities are determined based on market quotations. We continually evaluate our investments in mar- ketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earn- ings is recorded in Other Income and Expense, Net in the consolidated statements of income for all or a portion of the unreal- ized loss, and a new cost basis in the investment is established. As of December 31, 2006, no impairments were determined to exist. The following table shows certain summarized information related to our investments in marketable securities: Gross (dollars in millions) Gross Unrealized Unrealized Losses Fair Value Gains Cost At December 31, 2006 Short-term investments Investments in unconsolidated businesses Other assets At December 31, 2005 Short-term investments Investments in unconsolidated businesses Other assets $ 616 $ 28 $ – $ 644 259 594 $ 1,469 38 31 $ 97 (2) – $ (2) 295 625 $ 1,564 $ 373 $ 9 $ – $ 382 215 548 $ 1,136 13 19 $ 41 (3) – $ (3) 225 567 $ 1,174 54 Notes to Consolidated Financial Statements continued NOTE 7 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amount of goodwill are as follows: Balance at December 31, 2004 and 2005 Acquisitions Goodwill reclassifications and other Balance at December 31, 2006 Other Intangible Assets The following table displays the details of other intangible assets: Wireline $ $ 315 5,085 (90) 5,310 Gross Amount At December 31, 2006 Accumulated Amortization Finite-lived intangible assets: Customer lists (3 to 8 years) Non-network internal-use software (1 to 7 years) Other (1 to 25 years) Total Indefinite-lived intangible assets: Wireless licenses $ $ 1,278 7,777 204 9,259 $ 50,959 $ $ 270 3,826 23 4,119 (dollars in millions) Total 315 5,430 (90) 5,655 $ $ (dollars in millions) At December 31, 2005 Accumulated Amortization $ $ 3,279 3,193 3 6,475 Domestic Wireless $ $ – 345 – 345 Gross Amount $ 3,436 7,081 26 $ 10,543 $ 47,781 Customer lists of $1,278 million includes $1,162 million related to the MCI acquisition. Customer lists of $3,313 million at Domestic Wireless became fully amortized and were written off during 2006. Intangible asset amortization expense was $1,423 million, $1,444 million, and $1,334 million for the years ended December 31, 2006, 2005 and 2004, respectively. It is estimated to be $1,201 million in 2007, $1,047 million in 2008, $856 million in 2009, $633 million in 2010 and $483 million in 2011, primarily related to customer lists and non-net- work internal-use software. NOTE 8 INVESTMENTS IN UNCONSOLIDATED BUSINESSES Our investments in unconsolidated businesses are comprised of the following: At December 31, Ownership Investment Ownership 2006 2005 Investment (dollars in millions) Equity Investees CANTV Vodafone Omnitel Other Total equity investees Cost Investees Total investments in 28.5% $ 23.1 Various 230 3,624 744 4,598 28.5% $ 23.1 Various 152 2,591 770 3,513 Various 270 Various 1,089 unconsolidated businesses $ 4,868 $ 4,602 Dividends and repatriations of foreign earnings received from investees amounted to $42 million in 2006, $2,335 million in 2005 and $162 million in 2004, respectively, and are reported in Other, Net operating activities in the consolidated statements of cash flows. Equity Investees CANTV CANTV is Venezuela’s largest full-service telecommunications provider. CANTV offers local services, national and international long distance, Internet access and wireless services in Venezuela as well as public telephone, private network, data transmission, directory and other value-added services. Our $230 million invest- ment in CANTV is net of approximately $400 million of foreign cur- rency translation adjustments that are included in Accumulated Other Comprehensive Loss. In the second quarter of 2006, we reached a definitive agreement to sell our indirect 28.5% interest in CANTV to an entity jointly owned by América Móvil and Telmex. That agreement was terminated on February 8, 2007. On February 12, 2007, we announced our inten- tion to participate in the Venezuelan government’s offer to purchase our shares in CANTV through public tender offers in Venezuela and the U.S. (See Note 23). Vodafone Omnitel Vodafone Omnitel N.V. (Vodafone Omnitel) is an Italian digital cellular telecommunications company. It is the second largest wireless provider in Italy. At December 31, 2006 and 2005, our investment in Vodafone Omnitel included goodwill of $1,044 million and $937 million, respectively. During 2005, we repatriated $2,202 million of Vodafone Omnitel’s earnings through the repurchase of issued and outstanding shares of its equity. Vodafone Omnitel’s owners, Verizon and Vodafone Group Plc (Vodafone), participated on a pro rata basis; conse- quently, Verizon’s ownership interest after the share repurchase remained at 23.1%. Other Equity Investees Verizon has limited partnership investments in entities that invest in affordable housing projects, for which Verizon provides funding as a limited partner and receives tax deductions and tax credits based on its partnership interests. At December 31, 2006 and 2005, 55 Notes to Consolidated Financial Statements continued Verizon had equity investments in these partnerships of $659 million and $652 million, respectively. Verizon currently adjusts the carrying value of these investments for any losses incurred by the limited partnerships through earnings. The remaining investments include wireless partnerships in the U.S., and other smaller domestic and international investments. Cost Investees Some of our cost investments are carried at their current market value. Other cost investments are carried at their original cost, except in cases where we have determined that a decline in the estimated market value of an investment is other than temporary as described in Note 5. Our cost investments include a variety of domestic and international investments primarily involved in pro- viding communication services. Our cost investments in unconsolidated businesses included 43.4 million of shares of MCI common stock that were converted upon the closing of the MCI merger (see Note 2). Cellular Partnerships and Other In August 2002, Verizon Wireless and Price Communications Corp. (Price) combined Price’s wireless business with a portion of Verizon Wireless. The resulting limited partnership, Verizon Wireless of the East LP (VZ East), is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited part- nership interest in the new partnership which was exchangeable into the common stock of Verizon Wireless if an initial public offering of that stock occurred, or into the common stock of Verizon on the fourth anniversary of the asset contribution date. On August 15, 2006, Verizon delivered 29.5 million shares of newly-issued Verizon common stock to Price valued at $1,007 million in exchange for Price’s limited partnership interest in VZ East. Preferred Securities Issued By Subsidiaries On January 15, 2006, Verizon redeemed $100 million Verizon International Holdings Ltd. Series A variable term voting cumulative preferred stock at the redemption price per share of $100,000, plus accrued and unpaid dividends. NOTE 9 MINORITY INTEREST NOTE 10 LEASING ARRANGEMENTS As Lessor We are the lessor in leveraged and direct financing lease agree- ments under which commercial aircraft and power generating facilities, which comprise the majority of the portfolio, along with industrial equipment, real estate property, telecommunications and other equipment are leased for remaining terms up to 49 years as of December 31, 2006. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonre- course debt relating to leveraged lease transactions. Since we have no general liability for this debt, which holds a senior security interest in the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with GAAP. All recourse debt is reflected in our consolidated balance sheets. See Note 4 for information on lease impairment charges. Minority interests in equity of subsidiaries were as follows: At December 31, Minority interests in consolidated subsidiaries*: Wireless joint venture (55%) Cellular partnerships and other (various) Preferred securities issued by subsidiaries (dollars in millions) 2005 2006 $ 27,854 483 — $ 28,337 $ 24,683 1,650 100 $ 26,433 *Indicated ownership percentages are Verizon’s consolidated interests. Wireless Joint Venture The wireless joint venture was formed in April 2000 in connection with the combination of the U.S. wireless operations and interests of Verizon and Vodafone. The wireless joint venture operates as Verizon Wireless. Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone owns the remaining 45%. Under the terms of an investment agreement, Vodafone had the right to require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone’s interest in Verizon Wireless at desig- nated times (put windows) at its then fair market value, not to exceed $10 billion in any one put window. Vodafone had the right to require the purchase of up to $10 billion during a 61-day period which opened on June 10 and closed on August 9 in 2006, and did not exercise that right. As of December 31, 2006, Vodafone only has the right to require the purchase of up to $10 billion worth of its interest, during a 61-day period opening on June 10 and closing on August 9 in 2007, under its one remaining put window. Vodafone also may require that Verizon Wireless pay for up to $7.5 billion of the required repurchase through the assumption or incurrence of debt. In the event Vodafone exercises its one remaining put right, we (instead of Verizon Wireless) have the right, exercisable at our sole discretion, to purchase up to $2.5 billion of Vodafone’s interest for cash or Verizon stock at our option. 56 Notes to Consolidated Financial Statements continued Finance lease receivables, which are included in Prepaid Expenses and Other and Other Assets in our consolidated balance sheets are comprised of the following: At December 31, Minimum lease payments receivable Estimated residual value Unearned income Allowance for doubtful accounts Finance lease receivables, net Current Noncurrent Leveraged Leases $ $ 3,311 1,637 (1,895) 3,053 Direct Finance Leases $ $ 128 18 (22) 124 2006 Total 3,439 1,655 (1,917) 3,177 (175) 3,002 40 2,962 $ $ $ $ Leveraged Leases $ $ 3,847 1,937 (2,260) 3,524 Direct Finance Leases 123 9 (11) 121 $ $ (dollars in millions) 2005 Total 3,970 1,946 (2,271) 3,645 (375) 3,270 30 3,240 $ $ $ $ Accumulated deferred taxes arising from leveraged leases, which are included in Deferred Income Taxes, amounted to $2,674 million at December 31, 2006 and $3,049 million at December 31, 2005. The following table is a summary of the components of income from leveraged leases: Years Ended December 31, Pretax lease income Income tax expense/(benefit) Investment tax credits 2006 $ 96 57 4 (dollars in millions) 2004 2005 $ 119 (25) 4 $ 63 (52) 3 As Lessee We lease certain facilities and equipment for use in our operations under both capital and operating leases. Total rent expense from continuing operations under operating leases amounted to $1,608 million in 2006, $1,458 million in 2005 and $1,278 million in 2004. Capital lease amounts included in plant, property and equipment are as follows: The future minimum lease payments to be received from noncance- lable leases, net of nonrecourse loan payments related to leveraged and direct financing leases in excess of debt service requirements, for the periods shown at December 31, 2006, are as follows: At December 31, Capital leases Accumulated amortization Total 2006 359 (160) 199 $ $ (dollars in millions) 2005 $ $ 313 (137) 176 Years 2007 2008 2009 2010 2011 Thereafter Total Capital Leases $ 128 92 153 132 114 2,820 $ 3,439 (dollars in millions) Operating Leases $ $ 32 18 14 11 8 24 107 The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2006, are as follows: Years Capital Leases (dollars in millions) Operating Leases 2007 2008 2009 2010 2011 Thereafter Total minimum rental commitments Less interest and executory costs Present value of minimum lease payments Less current installments Long-term obligation at December 31, 2006 $ $ 80 69 64 55 51 161 480 (120) 360 (55) 305 $ 1,739 1,194 998 724 459 1,729 $ 6,843 As of December 31, 2006, the total minimum sublease rentals to be received in the future under noncancelable operating and capital subleases were $124 million and $0.9 million, respectively. 57 Notes to Consolidated Financial Statements continued NOTE 11 DEBT Debt Maturing Within One Year Debt maturing within one year is as follows: At December 31, (dollars in millions) 2005 2006 Long-term debt maturing within one year Commercial paper Other short-term debt Total debt maturing within one year $ 4,139 3,576 – $ 7,715 $ 4,526 2,152 10 $ 6,688 The weighted average interest rate for our commercial paper at year-end December 31, 2006 and December 31, 2005 was 5.3% and 4.3%, respectively. Capital expenditures (primarily acquisition and construction of net- work assets) are partially financed, pending long-term financing, through bank loans and the issuance of commercial paper payable within 12 months. At December 31, 2006, we had approximately $6.2 billion of unused bank lines of credit. Certain of these lines of credit contain require- ments for the payment of commitment fees. Long-Term Debt Outstanding long-term debt obligations are as follows: At December 31, Notes payable Interest Rates % Maturities 2006 (dollars in millions) 2005 4.00 – 8.25 2007 – 2035 $ 14,805 $ 15,610 Telephone subsidiaries – debentures and first/refunding mortgage bonds 4.63 – 7.00 7.15 – 7.65 7.85 – 8.75 2007 – 2042 2007 – 2032 2010 – 2031 Other subsidiaries – debentures and other 4.25 – 10.75 2007 – 2028 Zero-coupon convertible notes, net of unamortized discount of $– and $790 Employee stock ownership plan loans: NYNEX debentures Capital lease obligations (average rate 8.0% and 11.9%) – – 9.55 2010 Property sale holdbacks held in escrow, vendor financing and other – – 11,703 1,275 1,679 2,977 – 92 360 – 11,869 1,725 1,926 3,410 1,360 113 112 13 (106) 32,785 (4,139) $ 28,646 (43) 36,095 (4,526) $ 31,569 Unamortized discount, net of premium Total long-term debt, including current maturities Less: debt maturing within one year Total long-term debt Telephone Subsidiaries’ Debt Our first mortgage bonds of $100 million are secured by certain telephone operations assets. See Note 20 for additional information about guarantees of oper- ating subsidiary debt. Redemption of Debt Assumed in Merger On January 17, 2006, Verizon announced offers to purchase two series of MCI senior notes, MCI $1,983 million aggregate principal amount of 6.688% Senior Notes Due 2009 and MCI $1,699 million aggregate principal amount of 7.735% Senior Notes Due 2014, at 58 101% of their par value. Due to the change in control of MCI that occurred in connection with the merger with Verizon on January 6, 2006, Verizon was required to make this offer to noteholders within 30 days of the closing of the merger. Noteholders tendered $165 million of the 6.688% Senior Notes. Separately, Verizon notified noteholders that MCI was exercising its right to redeem both series of Senior Notes prior to maturity under the optional redemption procedures provided in the indentures. The 6.688% Notes were redeemed on March 1, 2006, and the 7.735% Notes were redeemed on February 16, 2006. Notes to Consolidated Financial Statements continued In addition, on January 20, 2006, Verizon announced an offer to repurchase MCI $1,983 million aggregate principal amount of 5.908% Senior Notes Due 2007 at 101% of their par value. On February 21, 2006, $1,804 million of these notes were redeemed by Verizon. Verizon satisfied and discharged the indenture governing this series of notes shortly after the close of the offer for those noteholders who did not accept this offer. Other Debt Redemptions/Prepayments During the second quarter of 2006, we redeemed/prepaid several debt issuances, including: Verizon North Inc. $200 million 7.625% Series C debentures due May 15, 2026; Verizon Northwest Inc. $175 million 7.875% Series B debentures due June 1, 2026; Verizon South Inc. $250 million 7.5% Series D debentures due March 15, 2026; Verizon California Inc. $25 million 9.41% Series W first mort- gage bonds due 2014; Verizon California Inc. $30 million 9.44% Series X first mortgage bonds due 2015; Verizon Northwest Inc. $3 million 9.67% Series HH first mortgage bonds due 2010 and Contel of the South Inc. $14 million 8.159% Series GG first mortgage bonds due 2018. The gain/(loss) from these retirements was immaterial. During the third quarter of 2005, we redeemed Verizon New England Inc. $250 million 6.875% debentures due October 1, 2023 resulting in a pretax charge of $10 million ($6 million after-tax) in connection with the early extinguishment of the debt. Zero-Coupon Convertible Notes Previously in May 2001, Verizon Global Funding issued approxi- mately $5.4 billion in principal amount at maturity of zero-coupon convertible notes due 2021, resulting in gross proceeds of approxi- mately $3 billion. The notes were convertible into shares of our common stock at an initial price of $69.50 per share if the closing price of Verizon common stock on the New York Stock Exchange exceeded specified levels or in other specified circumstances. The conversion price increased by at least 3% a year. The initial conver- sion price represented a 25% premium over the May 8, 2001 closing price of $55.60 per share. The notes were redeemable at the option of the holders on May 15th in each of the years 2004, 2006, 2011 and 2016. On May 15, 2004, $3,292 million of principal amount of the notes ($1,984 million after unamortized discount) were redeemed by Verizon Global Funding. In addition, the zero- coupon convertible notes were callable by Verizon on or after May 15, 2006. On May 16, 2006, we redeemed the remaining $1,375 mil- lion accreted principal of the remaining outstanding zero-coupon convertible principal. The total payment on the date of redemption was $1,377 million. Support Agreements All of Verizon Global Funding’s debt had the benefit of Support Agreements between us and Verizon Global Funding, which gave holders of Verizon Global Funding debt the right to proceed directly against us for payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt did not have recourse to the stock or assets of most of our telephone operations; however, they did have recourse to dividends paid to us by any of our consolidated subsidiaries as well as assets not covered by the exclusion. On February 1, 2006, Verizon announced the merger of Verizon Global Funding into Verizon. As a result of the merger all of Verizon Global Funding’s debt has been assumed by Verizon by operation of law. In addition, Verizon Global Funding had guaranteed the debt obli- gations of GTE Corporation (but not the debt of its subsidiary or affiliate companies) that were issued and outstanding prior to July 1, 2003. In connection with the merger of Verizon Global Funding into Verizon, Verizon has assumed this guarantee. As of December 31, 2006, $2,950 million principal amount of these obligations remained outstanding. Verizon and NYNEX Corporation are the joint and several co- obligors of the 20-Year 9.55% Debentures due 2010 previously issued by NYNEX on March 26, 1990. As of December 31, 2006, $92 million principal amount of this obligation remained out- standing. NYNEX and GTE no longer issue public debt or file SEC reports. See Note 20 for information on guarantees of operating subsidiary debt listed on the New York Stock Exchange. Debt Covenants We and our consolidated subsidiaries are in compliance with all of our debt covenants. Maturities of Long-Term Debt Maturities of long-term debt outstanding at December 31, 2006 are $4.1 billion in 2007, $2.5 billion in 2008, $1.4 billion in 2009, $2.8 billion in 2010, $2.6 billion in 2011 and $19.4 billion thereafter. NOTE 12 FINANCIAL INSTRUMENTS Derivatives The ongoing effect of SFAS No. 133 and related amendments and interpretations on our consolidated financial statements will be determined each period by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. Interest Rate Risk Management We have entered into domestic interest rate swaps, to achieve a tar- geted mix of fixed and variable rate debt, where we principally receive fixed rates and pay variable rates based on LIBOR. These swaps hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value in our balance sheet as assets and liabilities and adjust debt for the change in its fair value due to changes in interest rates. The ineffective portions of these hedges were recorded as gains in the consolidated statements of income of $4 million for the year ended December 31, 2004. We also enter into interest rate derivatives to limit our exposure to interest rate changes. In accordance with the provisions of SFAS No. 133, changes in fair value of these cash flow hedges due to interest rate fluctuations are recognized in Accumulated Other Comprehensive Loss. We recorded Other Comprehensive Income (Loss) of $14 million and $10 million related to these interest rate cash flow hedges for the years ended December 31, 2006 and 2005, respectively. Foreign Exchange Risk Management From time to time, our foreign exchange risk management has included the use of foreign currency forward contracts and cross currency interest rate swaps with foreign currency forwards. These contracts are typically used to hedge short-term foreign currency transactions and commitments, or to offset foreign exchange gains or losses on the foreign currency obligations and are designated as cash flow hedges. There were no foreign currency contracts out- standing as of December 31, 2006 and 2005. We record these contracts at fair value as assets or liabilities and the related gains or losses are deferred in shareowners’ investment as a component of Accumulated Other Comprehensive Loss. We have recorded net 59 Notes to Consolidated Financial Statements continued Fair Values of Financial Instruments The tables that follow provide additional information about our significant financial instruments: Financial Instrument Valuation Method Cash and cash equivalents and Carrying amounts short-term investments Short- and long-term debt (excluding capital leases) Market quotes for similar terms and maturities or future cash flows discounted at current rates Cost investments in unconsolidated Future cash flows discounted businesses, derivative assets and liabilities and notes receivable at current rates, market quotes for similar instruments or other valuation models At December 31, Short- and long-term debt Cost investments in 2006 (dollars in millions) 2005 Carrying Amount Fair Value Carrying Amount Fair Value $ 36,000 $ 37,165 $ 38,145 $ 39,549 unconsolidated businesses 270 270 1,089 1,089 Short- and long-term derivative assets Short- and long-term derivative liabilities 31 10 31 10 62 21 62 21 unrealized gains of $17 million in Other Comprehensive Income (Loss) for the year ended December 31, 2004. fluctuations were Net Investment Hedges During 2005, we entered into zero cost euro collars to hedge a por- tion of our net investment in Vodafone Omnitel. In accordance with the provisions of SFAS No. 133 and related amendments and inter- pretations, changes in fair value of these contracts due to exchange in Accumulated Other recognized rate Comprehensive Loss and offset the impact of foreign currency changes on the value of our net investment. During 2005, our posi- tions in the zero cost euro collars were settled. As of December 31, 2006 and 2005, Accumulated Other Comprehensive Loss includes unrecognized gains of $2 million related to these hedge contracts, which along with the unrealized foreign currency translation balance of the investment hedged, remains unless the investment is sold. During 2004, we entered into foreign currency forward contracts to hedge our net investment in our Canadian operations. In accor- dance with the provisions of SFAS No. 133, changes in the fair value of these contracts due to exchange rate fluctuations were recognized in Accumulated Other Comprehensive Loss and offset the impact of foreign currency changes on the value of our net investment. During 2004, we sold our Canadian operations and the unrealized losses on these net investment hedge contracts were recognized in net income along with the corresponding foreign cur- rency translation balance. We recorded realized losses of $106 million ($58 million after-tax) related to these hedge contracts. Other Derivatives On May 17, 2005, we purchased 43.4 million shares of MCI common stock under a stock purchase agreement that contained a provision for the payment of an additional cash amount determined immediately prior to April 9, 2006 based on the market price of Verizon’s common stock. (See Note 2). Under SFAS No. 133, this additional cash payment was an embedded derivative which we carried at fair value and was subject to changes in the market price of Verizon stock. Since this derivative did not qualify for hedge accounting under SFAS No. 133, changes in its fair value were recorded in the consolidated statements of income in Other Income and (Expense), Net. During 2006 and 2005, we recorded pretax income of $4 million and $57 million, respectively, in connection with this embedded derivative. As of December 31, 2006, this embedded derivative has expired with no requirement for an addi- tional cash payment made under the stock purchase agreement. Concentrations of Credit Risk Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, certain notes receivable including lease receivables and derivative contracts. Our policy is to deposit our temporary cash investments with major financial institu- tions. Counterparties to our derivative contracts are also major financial institutions and organized exchanges. The financial institu- tions have all been accorded high ratings by primary rating agencies. We limit the dollar amount of contracts entered into with any one financial institution and monitor our counterparties’ credit ratings. We generally do not give or receive collateral on swap agreements due to our credit rating and those of our counterparties. While we may be exposed to credit losses due to the nonperfor- mance of our counterparties, we consider the risk remote and do not expect the settlement of these transactions to have a material effect on our results of operations or financial condition. 60 Notes to Consolidated Financial Statements continued NOTE 13 EARNINGS PER SHARE AND SHAREOWNERS’ INVESTMENT Earnings Per Share The following table is a reconciliation of the numerators and denominators used in computing earnings per common share: Years Ended December 31, (dollars and shares in millions, except per share amounts) 2006 2004 2005 Net Income Used For Basic Earnings Per Common Share Income before discontinued operations and cumulative effect of accounting change Income on discontinued operations, $ 5,480 $ 6,027 5,899 net of tax 759 1,370 1,932 Cumulative effect of accounting change, net of tax Net income $ (42) – 6,197 $ 7,397 $ 7,831 – Net Income Used For Diluted Earnings Per Common Share Income before discontinued operations and cumulative effect of accounting change After-tax minority interest expense related to exchangeable equity interest After-tax interest expense related to zero-coupon convertible notes Income before discontinued operations and cumulative effect of accounting change – after assumed conversion of dilutive securities Income on discontinued operations, $ 5,480 $ 6,027 $ 5,899 20 11 32 28 27 41 5,511 6,087 5,967 net of tax 759 1,370 1,932 Cumulative effect of accounting change, net of tax (42) – – Net income – after assumed conversion of dilutive securities $ 6,228 $ 7,457 $ 7,899 Basic Earnings Per Common Share(1) Weighted-average shares outstanding – basic 2,912 2,766 2,770 Income before discontinued operations and cumulative effect of accounting change Income on discontinued operations, $ 1.88 $ 2.18 $ 2.13 net of tax .26 .50 .70 Cumulative effect of accounting change, net of tax Net income (.01) 2.13 $ – 2.67 $ – 2.83 $ Diluted Earnings Per Common Share(1) Weighted-average shares outstanding Effect of dilutive securities: Stock options Exchangeable equity interest Zero-coupon convertible notes Weighted-average shares – diluted Income before discontinued operations and cumulative effect of accounting change Income on discontinued operations, 2,912 2,766 2,770 1 18 7 2,938 5 29 17 2,817 5 29 27 2,831 $ 1.88 $ 2.16 $ 2.11 net of tax .26 .49 .68 Cumulative effect of accounting change, net of tax Net income (.01) 2.12 $ – 2.65 $ – 2.79 $ (1) Total per share amounts may not add due to rounding. Certain outstanding options to purchase shares were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the period, including approximately 228 million shares during 2006, 250 million shares during 2005 and 262 million shares during 2004. The zero-coupon convertible notes were retired on May 15, 2006. (see Note 11). The exchangeable equity interest was converted on August 15, 2006 by issuing 29.5 million Verizon shares (see Note 9). Shareowners’ Investment Our certificate of incorporation provides authority for the issuance of up to 250 million shares of Series Preferred Stock, $.10 par value, in one or more series, with such designations, preferences, rights, qualifications, limitations and restrictions as the Board of Directors may determine. We are authorized to issue up to 4.25 billion shares of common stock. On January 22, 2004, the Board of Directors authorized the repur- chase of up to 80 million common shares terminating no later than the close of business on February 28, 2006. We repurchased 7.9 million and 9.5 million common shares during 2005 and 2004, respectively. On January 19, 2006, the Board of Directors determined that no additional common shares may be purchased under the previously authorized program and gave authorization to repurchase of up to 100 million common shares terminating no later than the close of business on February 28, 2008. We repurchased approximately 50 million common shares under this authorization during 2006. 61 Notes to Consolidated Financial Statements continued NOTE 14 STOCK-BASED COMPENSATION Effective January 1, 2006, we adopted SFAS No. 123(R) utilizing the modified prospective method. SFAS No. 123(R) requires the meas- urement of stock-based compensation expense based on the fair value of the award on the date of grant. Under the modified prospective method, the provisions of SFAS No. 123(R) apply to all awards granted or modified after the date of adoption. The impact to Verizon primarily resulted from Verizon Wireless, for which we recorded a $42 million cumulative effect of accounting change, net of taxes and after minority interest, to recognize the effect of initially measuring the outstanding liability for awards granted to Domestic Wireless employees at fair value utilizing a Black-Scholes model. Previously, effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 using the prospective method (as permitted under SFAS No. 148, Accounting for Stock- Based Compensation – Transition and Disclosure) for all new awards granted, modified or settled after January 1, 2003. Verizon Communications Long Term Incentive Plan The Verizon Communications Long Term Incentive Plan (the “Plan”), permits the grant of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, performance share units and other awards. The maximum number of shares for awards is 200 million. Restricted Stock Units The Plan provides for grants of restricted stock units (RSUs) that vest at the end of the third year after the grant. The RSUs are clas- sified as liability awards because the RSUs are paid in cash upon vesting. The RSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of Verizon’s stock. The following table summarizes Verizon’s Restricted Stock Unit activity: (Shares in thousands) Outstanding, January 1, 2004 Granted Cancelled/Forfeited Outstanding, December 31, 2004 Granted Cancelled/Forfeited Outstanding, December 31, 2005 Granted Cancelled/Forfeited Outstanding, December 31, 2006 Restricted Stock Units – 532 (7) 525 6,410 (66) 6,869 9,116 (392) 15,593 Weighted Average Grant-Date Fair Value $ – 36.75 36.75 36.75 36.06 36.07 36.12 31.88 35.01 33.67 Performance Share Units The Plan also provides for grants of performance share units (PSUs) that vest at the end of the third year after the grant. The 2006, 2005 and 2004 performance share units will be paid in cash upon vesting. The 2003 PSUs were paid out in February 2006 in Verizon shares. The target award is determined at the beginning of the period and can increase (to a maximum 200% of the target) or decrease (to zero) based on a key performance measure, Total Shareholder Return (TSR). At the end of the period, the PSU payment is deter- mined by comparing Verizon’s TSR to the TSR of a predetermined peer group and the S&P 500 companies. All payments are subject to approval by the Board’s Human Resources Committee. The PSUs are classified as liability awards because the PSU awards are paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the performance of Verizon’s stock as well as Verizon’s TSR relative to the peer group’s TSR and S&P 500 TSR. The following table summarizes Verizon’s Performance Share Unit activity: (Shares in thousands) Outstanding, January 1, 2004 Granted Cancelled/Forfeited Outstanding, December 31, 2004 Granted Cancelled/Forfeited Outstanding, December 31, 2005 Granted Payments Cancelled/Forfeited Outstanding, December 31, 2006 Performance Share Units 4,219 6,477 (617) 10,079 9,300 (288) 19,091 14,166 (3,607) (1,227) 28,423 Weighted Average Grant-Date Fair Value $ 38.54 36.81 37.40 37.50 36.13 36.91 36.84 32.05 38.54 37.25 34.22 As of December 31, 2006, unrecognized compensation expense related to the unvested portion of Verizon’s RSUs and PSUs was approximately $392 million and is expected to be recognized over the next two years. MCI Restricted Stock Plan MCI’s Management Restricted Stock Plan (MRSP) provides for the granting of stock-based compensation to management. Following the acquisition by Verizon on January 6, 2006, awards outstanding under the MRSP were converted into Verizon common stock in accordance with the Merger Agreement. MCI has not issued new MRSPs since February 2005. The following table summarizes MRSP’s restricted stock activity: (Shares in thousands) Outstanding, January 1, 2006 Acquisition by Verizon Payments Cancellations/Forfeitures Outstanding, December 31, 2006 Restricted Stock – 3,456 (2,756) (53) 647 Weighted Average Grant-Date Fair Value $ – 30.75 30.75 30.75 30.75 62 Notes to Consolidated Financial Statements continued As of December 31, 2006, unrecognized compensation expense related to the unvested portion of the MRSP restricted stock was approximately $9 million and is expected to be recognized over the next year. Verizon Wireless Long-Term Incentive Plan The 2000 Verizon Wireless Long-Term Incentive Plan (the “Wireless Plan”) provides compensation opportunities to eligible employees and other participating affiliates of the Cellco Partnership, d.b.a. Verizon Wireless (the “Partnership”). The Wireless Plan provides rewards that are tied to the long-term performance of the Partnership. Under the Wireless Plan, VARs are granted to eligible employees. The aggregate number of VARs that may be issued under the Wireless Plan is approximately 343 million. VARs reflect the change in the value of the Partnership, as defined in the Wireless Plan, similar to stock options. Once VARs become vested, employees can exercise their VARs and receive a payment that is equal to the difference between the VAR price on the date of grant and the VAR price on the date of exercise, less applicable taxes. VARs are fully exercisable three years from the date of grant with a maximum term of 10 years. All VARs are granted at a price equal to the estimated fair value of the Partnership, as defined in the Wireless Plan, at the date of the grant. With the adoption of SFAS No. 123(R), the Partnership began esti- mating the fair value of VARs granted using a Black-Scholes option valuation model. The following table summarizes the assumptions used in the model during 2006: As of December 31, 2006, unrecognized compensation expense related to the unvested portion of the VARs was approximately $50 million and is expected to be recognized within one year. Stock-Based Compensation Expense After-tax compensation expense for stock based compensation related to RSUs, PSUs, MRSPs and VARs described above included in net income as reported was $535 million, $359 million and $248 million for 2006, 2005 and 2004, respectively. Stock Options The Verizon Long Term Incentive Plan provides for grants of stock options to employees at an option price per share of 100% of the fair market value of Verizon Stock on the date of grant. Each grant has a 10 year life, vesting equally over a three year period, starting at the date of the grant. We have not granted new stock options since 2004. We determined stock-option related employee compensation expense for the 2004 grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected lives (in years) Weighted average value of options granted 2004 4.2% 31.3% 3.3% 6 7.61 $ The following table summarizes Verizon’s stock option activity. Risk-free interest rate Expected term (in years) Expected volatility Expected dividend yield Ranges 4.6% - 5.2% 1.0 - 3.5 17.6% - 22.3% n/a The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the measurement date. The expected term of the VARs granted was estimated using a combination of the simplified method as prescribed in Staff Accounting Bulletin (SAB) No. 107, “Share Based Payments,” (SAB No. 107) historical experience, and management judgment. Expected volatility was based on a blend of the historical and implied volatility of publicly traded peer compa- nies for a period equal to the VARs expected life, ending on the measurement date, and calculated on a monthly basis. The following table summarizes the VARs activity: (Shares in thousands) Outstanding rights, January 1, 2004 Granted Exercised Cancelled/Forfeited Outstanding rights, December 31, 2004 Granted Exercised Cancelled/Forfeited Outstanding rights, December 31, 2005 Exercised Cancelled/Forfeited Outstanding rights, December 31, 2006 VARs 119,809 48,999 (2,144) (6,003) 160,661 10 (47,964) (3,784) 108,923 (7,448) (7,008) 94,467 Weighted Average Grant-Date Fair Value $ 16.31 13.89 16.39 14.65 15.63 14.85 12.27 15.17 17.12 13.00 23.25 16.99 (Shares in thousands) Outstanding, January 1, 2004 Granted Exercised Cancelled/forfeited Outstanding, December 31, 2004 Exercised Cancelled/forfeited Outstanding, December 31, 2005 Exercised Cancelled/forfeited Options outstanding, December 31, 2006 Options exercisable, December 31, 2004 2005 2006 Stock Options 280,581 17,413 (10,519) (6,586) 280,889 (1,133) (19,996) 259,760 (3,371) (27,025) Weighted Average Exercise Price $ 46.24 35.51 28.89 48.01 46.18 28.73 49.62 46.01 32.12 43.72 229,364 46.48 247,461 244,424 225,067 47.26 46.64 46.69 63 Notes to Consolidated Financial Statements continued The following table summarizes information about Verizon’s stock options outstanding as of December 31, 2006: Range of Exercise Prices $ 20.00 – 29.99 30.00 – 39.99 40.00 – 49.99 50.00 – 59.99 60.00 – 69.99 Total Shares (in thousands) Weighted-Average Remaining Life Stock Options Outstanding Weighted-Average Exercise Price Stock Options Exercisable Weighted-Average Shares Exercise Price (in thousands) 73 44,874 96,154 87,687 576 229,364 3.4 years 5.5 3.7 3.1 2.8 $ 28.50 36.36 43.92 54.40 60.93 46.48 73 40,577 96,154 87,687 576 225,067 $ 28.50 36.45 43.92 54.40 60.93 46.69 The weighted average remaining contractual term was 3.8 years for stock options outstanding and exercisable as of December 31, 2006. The total intrinsic value was approximately $44 million and $37 million for stock options outstanding and exercisable, respec- tively, as of December 31, 2006. The total intrinsic value for stock options exercised was $10 million, $6 million and $97 million, during 2006, 2005 and 2004, respectively. The amount of cash received from the exercise of stock options was approximately $101 million, $34 million and $306 million for 2006, 2005 and 2004, respectively. The after-tax compensation expense for stock options was $28 mil- lion, $53 million and $50 million for 2006, 2005 and 2004, respectively. As of December 31, 2006, unrecognized compensa- tion expense related to the unvested portion of stock options was approximately $3 million. 64 NOTE 15 EMPLOYEE BENEFITS We maintain noncontributory defined benefit pension plans for many of our employees. The postretirement health care and life insurance plans for our retirees and their dependents are both con- tributory and noncontributory and include a limit on the company’s share of cost for certain recent and future retirees. We also sponsor defined contribution savings plans to provide opportunities for eli- gible employees to save for retirement on a tax-deferred basis. We use a measurement date of December 31 for our pension and postretirement health care and life insurance plans. In September 2006, the FASB issued SFAS No. 158. SFAS No. 158 requires the recognition of a defined benefit postretirement plan’s funded status as either an asset or liability on the balance sheet. SFAS No. 158 also requires the immediate recognition of the unrec- ognized actuarial gains and losses and prior service costs and credits that arise during the period as a component of other accumulated comprehensive income, net of applicable income taxes. Additionally, the fair value of plan assets must be determined as of the company’s year-end. We adopted SFAS No. 158 effective December 31, 2006 which resulted in a net decrease to shareowners’ investment of $6,883 million. This included a net increase in pension obligations of $2,403 million, an increase in Other Postretirement Benefits Obligations of $10,828 million and an increase in Other Employee Benefit Obligations of $31 million, partially offset by a net decrease of $1,205 million to reverse the Additional Minimum Pension Liability and an increase in deferred taxes of $5,174 million. If we had recorded an Additional Minimum Pension Liability at December 31, 2006, it would have been $396 million, ($262 million after-tax). Pension and Other Postretirement Benefits Pension and other postretirement benefits for many of our employees are subject to collective bargaining agreements. Modifications in ben- efits have been bargained from time to time, and we may also periodically amend the benefits in the management plans. As of June 30, 2006, Verizon management employees no longer earned pension benefits or earned service towards the company retiree medical subsidy. In addition, new management employees hired after December 31, 2005 are not eligible for pension benefits and managers with less than 13.5 years of service as of June 30, 2006 are not eligible for company-subsidized retiree healthcare or retiree life insurance benefits. Beginning July 1, 2006, management employees receive an increased company match on their savings plan contributions. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions asso- ciated with pension and postretirement health care and life insurance benefit plans. Notes to Consolidated Financial Statements continued Obligations and Funded Status At December 31, Change in Benefit Obligation Beginning of year Service cost Interest cost Plan amendments Actuarial (gain) loss, net Benefits paid Termination benefits Acquisitions and divestitures, net Settlements End of year Change in Plan Assets Beginning of year Actual return on plan assets Company contributions Benefits paid Settlements Acquisitions and divestitures, net End of year Funded Status End of year Unrecognized Actuarial loss, net Prior service cost Net amount recognized Amounts recognized on the balance sheet Prepaid pension cost (in Other Assets) Other assets Employee benefit obligation Accumulated other comprehensive loss Net amount recognized Amounts recognized in Accumulated Other Comprehensive Income Actuarial loss, net Prior service cost Total Estimated amounts to be amortized from Accumulated Other Comprehensive Income during 2007 fiscal year Actuarial loss, net Prior service cost Total Pension 2005 $ 35,479 675 1,959 149 327 (2,831) 11 (194) (35) $ 35,540 37,461 4,136 698 (2,831) (35) (202) $ 39,227 3,687 4,685 1,018 9,390 $ $ 12,704 458 (4,977) 1,205 9,390 $ 2006 $ 35,540 581 1,995 – (282) (2,762) 47 477 (1,437) $ 34,159 39,227 5,536 568 (2,762) (1,437) 377 $ 41,509 7,350 – – 7,350 $ $ 12,058 – (4,708) – 7,350 $ $ $ $ $ 1,428 975 2,403 98 43 141 (dollars in millions) Health Care and Life 2005 2006 $ 26,783 356 1,499 50 152 (1,564) 14 40 – $ 27,330 4,275 493 1,099 (1,564) – – 4,303 $ $ 26,181 358 1,467 69 403 (1,662) 1 (34) – $ 26,783 4,549 348 1,040 (1,662) – – 4,275 $ (23,027) (22,508) 7,056 4,339 $ (11,113) $ – – (11,113) – $ (11,113) – – $ (23,027) $ – – (23,027) – $ (23,027) $ 6,799 4,029 $ 10,828 $ $ 316 393 709 Changes in benefit obligations were caused by factors including changes in actuarial assumptions, curtailments and settlements. Information for pension plans with an accumulated benefit obliga- tion in excess of plan assets follows: In 2005, as a result of changes in management retiree benefits, we recorded pretax expense of $430 million for pension curtailments and pretax income of $332 million for retiree medical curtailments (see Note 4 for additional information). The accumulated benefit obligation for all defined benefit pension plans was $32,724 million and $34,232 million at December 31, 2006 and 2005, respectively. At December 31, Projected benefit obligation Accumulated benefit obligation Fair value of plan assets (dollars in millions) 2005 2006 $ 11,495 11,072 8,288 $ 11,567 11,165 7,500 65 Notes to Consolidated Financial Statements continued Net Periodic Cost The following table displays the details of net periodic pension and other postretirement costs: Years Ended December 31, Service cost Interest cost Expected return on plan assets Amortization of transition asset Amortization of prior service cost Actuarial loss, net Net periodic benefit (income) cost Termination benefits Settlement loss Curtailment (gain) loss and other, net Subtotal Total cost 2006 581 1,995 (3,173) – 44 182 (371) 47 56 – 103 (268) $ $ 2005 675 1,959 (3,231) – 42 124 (431) 11 80 436 527 96 $ $ Pension 2004 $ $ 666 2,144 (3,565) (4) 57 45 (657) 1 805 – 806 149 2006 356 1,499 (328) – 360 290 2,177 14 – – 14 2,191 $ $ (dollars in millions) Health Care and Life 2004 2005 $ $ 358 1,467 (349) – 290 258 2,024 1 – (332) (331) 1,693 $ $ 269 1,422 (409) – 236 169 1,687 – – – – 1,687 Termination benefits and settlement and curtailment losses of $94 million pertaining to the sale of Hawaii operations in 2005 were recorded in the consolidated statements of income in Sales of Businesses, Net. Additional Information As a result of the adoption of SFAS No. 158, we no longer record an additional minimum pension liability. In prior years, as a result of changes in interest rates and changes in investment returns, an adjustment to the additional minimum pension liability was required for a number of plans, as indicated below. The adjustment in the liability was recorded as a charge or (credit) to Accumulated Other Comprehensive Loss, net of tax, in shareowners’ investment in the consolidated balance sheets. Years Ended December 31, 2006 2005 (dollars in millions) 2004 Increase (decrease) in minimum liability included in other comprehensive income, net of tax $ (788) $ (51) $ 332 Assumptions The weighted-average assumptions used in determining benefit obligations follow: At December 31, Discount rate Rate of future increases in compensation 2006 6.00% 4.00 Pension 2005 5.75% 4.00 Health Care and Life 2005 2006 6.00% 4.00 5.75% 4.00 The weighted-average assumptions used in determining net periodic cost follow: Years Ended December 31, Discount rate Expected return on plan assets Rate of compensation increase 2006 5.75% 8.50 4.00 2005 5.75% 8.50 5.00 Pension 2004 6.25% 8.50 5.00 2006 5.75% 8.25 4.00 Health Care and Life 2004 2005 5.75% 7.75 4.00 6.25% 8.50 4.00 66 Notes to Consolidated Financial Statements continued In order to project the long-term target investment return for the total portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period, or longer. Those estimates are based on a combination of factors including the following: current market interest rates and valuation levels, consensus earnings expectations, historical long-term risk pre- miums and value-added. To determine the aggregate return for the pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy. The assumed Health Care Cost Trend Rates follow: Health Care and Life 2005 2006 2004 At December 31, Health care cost trend rate assumed for next year Rate to which cost trend rate gradually declines Year the rate reaches level it is assumed The portfolio strategy emphasizes a long-term equity orientation, significant global diversification, the use of both public and private investments and professional financial and operational risk controls. Assets are allocated according to a long-term policy neutral position and held within a relatively narrow and pre-determined range. Both active and passive management approaches are used depending on perceived market efficiencies and various other factors. Cash Flows In 2006, we contributed $451 million to our qualified pension trusts, $117 million to our nonqualified pension plans and $1,099 million to our other postretirement benefit plans. We estimate required quali- fied pension trust contributions for 2007 to be approximately $510 million. We also anticipate $120 million in contributions to our non-qualified pension plans and $1,210 million to our other post- retirement benefit plans in 2007. 10.00% 10.00% 10.00% 5.00 5.00 5.00 Estimated Future Benefit Payments The benefit payments to retirees, which reflect expected future service, are expected to be paid as follows: to remain thereafter 2011 2010 2009 A one-percentage-point change in the assumed health care cost trend rate would have the following effects: One-Percentage-Point Effect on 2006 service and interest cost Effect on postretirement benefit obligation Increase (dollars in millions) Decrease $ 282 $ (223) as of December 31, 2006 3,339 (2,731) Health Care and Life Prior to Pension Medicare Prescription Drug Subsidy Benefits 1,717 2,491 1,806 2,552 1,869 2,749 1,936 3,042 1,991 3,503 9,983 16,472 $ (dollars in millions) $ Expected Medicare Prescription Drug Subsidy 91 97 102 108 112 589 $ 2007 2008 2009 2010 2011 2012 – 2016 Plan Assets Pension Plans The weighted-average asset allocations for the pension plans by asset category follow: At December 31, Asset Category Equity securities Debt securities Real estate Other Total 2006 2005 62.5% 16.3 4.5 16.7 100.0% 63.4% 17.5 3.2 15.9 100.0% Equity securities include Verizon common stock of $95 million and $72 million at December 31, 2006 and 2005, respectively. Other assets include cash and cash equivalents (primarily held for the payment of benefits), private equity and investments in absolute return strategies. Health Care and Life Plans The weighted-average asset allocations for the other postretirement benefit plans by asset category follow: Savings Plan and Employee Stock Ownership Plans We maintain four leveraged employee stock ownership plans (ESOP), only one plan currently has unallocated shares. Under this plan, we match a certain percentage of eligible employee contribu- tions to the savings plans with shares of our common stock from this ESOP. Common stock is allocated from the leveraged ESOP trust based on the proportion of principal and interest paid on ESOP debt in a year to the remaining principal and interest due over the term of the debt. The final debt service payments and related share allocations for two of our leveraged ESOPs were made in 2004. At December 31, 2006, the number of unallocated and allo- cated shares of common stock was 5 million and 77 million, respectively. All leveraged ESOP shares are included in earnings per share computations. Total savings plan costs were $669 million, $499 million, and $501 million in 2006, 2005 and 2004 respectively. A portion of these costs were funded through a leveraged ESOP. We recognize lever- aged ESOP costs based on the shares allocated method. Leveraged ESOP costs and trust activity consist of the following: At December 31, Asset Category Equity securities Debt securities Real estate Other Total 2006 2005 Years Ended December 31, 72.1% 20.4 0.1 7.4 100.0% 71.9% 22.1 0.1 5.9 100.0% Compensation Interest incurred Dividends Net leveraged ESOP cost Equity securities include Verizon common stock of $4 million at December 31, 2005. There was no Verizon common stock held at the end of 2006. 2006 (dollars in millions) 2004 2005 $ $ 24 $ – (9) 15 $ 39 $ – (16) 23 $ 159 12 (16) 155 67 Notes to Consolidated Financial Statements continued Severance Benefits The following table provides an analysis of our severance liability recorded in accordance with SFAS Nos. 112 and 146: Year 2004 2005 2006 Beginning Charged to Expense of Year Payments Other End of Year (dollars in millions) $ 2,150 $ 753 596 (40) $ (1,356) $ 99 343 (251) (383) (1) $ (5) 88 753 596 644 The remaining severance liability includes future contractual pay- ments to employees separated as of December 31, 2006. The 2006 expense includes charges for the involuntary separation of 4,100 employees (see Note 4). NOTE 16 INCOME TAXES The components of Income Before Provision for Income Taxes, Discontinued Operations and Cumulative Effect of Accounting Change are as follows: Years Ended December 31, Domestic Foreign 2006 (dollars in millions) 2004 2005 $ $ 6,682 $ 7,496 $ 6,186 1,472 1,791 952 8,154 $ 8,448 $ 7,977 The components of the provision for income taxes from continuing operations are as follows: Years Ended December 31, 2006 (dollars in millions) 2004 2005 Current Federal Foreign State and local Deferred Federal Foreign State and local $ 2,364 $ 2,772 $ 141 420 2,925 81 661 3,514 (162) 249 271 358 (9) (45) (190) (244) (7) 1,580 53 95 1,728 (8) 2,674 $ 2,421 $ 2,078 (844) (55) (187) (1,086) (7) Investment tax credits Total income tax expense $ The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate: Years Ended December 31, 2006 2005 2004 Statutory federal income tax rate State and local income tax, net of federal tax benefits Tax benefits from investment losses Equity in earnings from unconsolidated businesses Other, net Effective income tax rate 35.0% 35.0% 35.0% 1.8 (.9) 3.6 (4.5) 3.0 (3.7) (3.8) .7 32.8% (3.5) (1.9) 28.7% (8.0) (.2) 26.1% 68 The favorable impact on our 2006 effective income tax rate was pri- marily driven by earnings from our unconsolidated businesses and tax benefits from valuation allowance reversals. These favorable impacts to the 2006 effective tax rate were partially offset by the unfavorable impact of tax reserve adjustments which is included in the Other, net line above. During 2006, we recorded a tax benefit of $80 million in connection with capital gains and prior year investment losses. During 2005, we recorded a tax benefit of $336 million in connec- tion with capital gains and prior year investment losses. As a result of the capital gain realized in 2005 in connection with the sale of our Hawaii businesses, we recorded a tax benefit of $242 million related to prior year investment losses. Also during 2005, we recorded a net tax provision of $206 million related to the repatriation of foreign earnings under the provisions of the American Jobs Creation Act of 2004, which provides for a favorable federal income tax rate in con- nection with the repatriation of foreign earnings, provided the criteria described in the law is met. Two of our foreign investments repatriated earnings resulting in income taxes of $332 million, par- tially offset by a tax benefit of $126 million. The favorable impact on our 2004 effective income tax rate was pri- marily driven by increased earnings from our unconsolidated businesses and tax benefits from valuation allowance reversals. Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax liabilities (assets) are shown in the following table: At December 31, Employee benefits Loss on investments Former MCI tax loss carry forwards Uncollectible accounts receivable Valuation allowance Deferred tax assets Former MCI intercompany accounts receivable basis difference Depreciation Leasing activity Wireless joint venture including wireless licenses Other – net Deferred tax liabilities (dollars in millions) 2005 2006 $ (7,788) (124) (2,026) (455) (10,393) 2,600 (7,793) 2,003 7,617 2,638 12,177 782 25,217 $ (1,778) (369) – (375) (2,522) 815 (1,707) – 9,676 3,001 11,786 (370) 24,093 Net deferred tax liability $ 17,424 $ 22,386 Net long-term deferred tax liabilities $ 16,270 $ 22,831 Plus net current deferred tax liabilities (in Other current liabilities) 1,154 – Less net current deferred tax assets (in Prepaid expenses and other) Net deferred tax liability – $ 17,424 445 $ 22,386 At December 31, 2006, employee benefits deferred tax assets include $5,174 million as a result of the adoption of SFAS No. 158 (see Note 15). At December 31, 2006, undistributed earnings of our foreign sub- sidiaries amounted to approximately $3 billion. Deferred income taxes are not provided on these earnings as it is intended that the Notes to Consolidated Financial Statements continued earnings are indefinitely invested outside of the U.S. It is not prac- tical to estimate the amount of taxes that might be payable upon the remittance of such earnings. NOTE 17 SEGMENT INFORMATION The valuation allowance primarily represents the tax benefits of cer- tain foreign and state net operating loss carry forwards, capital loss carry forwards and other deferred tax assets which may expire without being utilized. During 2006, the valuation allowance increased $1,785 million. This increase was primarily due to the addition of former MCI valuation allowances. This increase was offset by valuation allowance reversals relating to utilizing prior year investment losses to offset the capital gains realized on the sale of various businesses including Verizon Dominicana. Former MCI tax loss carry forwards include federal, state and for- eign net operating loss tax carry forwards as well as capital loss tax carry forwards. As a result of the MCI Bankruptcy and the applica- tion of the related tax attribute reduction rules, MCI reduced the tax basis in intercompany accounts receivables. This reduction in tax basis results in a deferred tax liability as reflected above. included Reportable Segments On November 17, 2006, we completed the spin-off of our U.S. print and Internet yellow pages directories to our shareowners, which was included in the Information Services segment. The spin-off resulted in a new company, named Idearc Inc. In addition, we reached definitive agreements to sell our interests in TELPRI and Verizon Dominicana, each of which were in the International segment. The operations of our U.S. print and Internet yellow pages directories business, Verizon Dominicana and TELPRI are reported as discontinued operations and assets held for sale. Accordingly we have two reportable segments, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment income. Corporate, eliminations and other includes unallocated corporate expenses, intersegment elimina- tions recorded in consolidation, the results of other businesses such as our investments in unconsolidated businesses, primarily Omnitel and CANTV, lease financing, and asset impairments and expenses that are not allocated in assessing segment performance due to their non-recurring nature. These adjustments include trans- actions that the chief operating decision makers exclude in assessing business unit performance due primarily to their non- recurring and/or non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating deci- sion makers’ assessment of unit performance. Our segments and their principal activities consist of the following: Wireline Wireline provides communications services including voice, broadband video and data, next generation IP network services, network access, long distance and other services to consumers, carriers, business and govern- ment customers both domestically and globally in 150 countries. Domestic Wireless Domestic wireless products and services include wireless voice and data products and other value added services and equipment sales across the United States. 69 Notes to Consolidated Financial Statements continued The following table provides operating financial information for our two reportable segments: 2006 External revenues Intersegment revenues Total operating revenues Cost of services and sales Selling, general & administrative expense Depreciation & amortization expense Total operating expenses Operating income Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Provision for income taxes Segment income Assets Investments in unconsolidated businesses Plant, property and equipment, net Capital expenditures 2005 External revenues Intersegment revenues Total operating revenues Cost of services and sales Selling, general & administrative expense Depreciation & amortization expense Total operating expenses Operating income Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Provision for income taxes Segment income Assets Investments in unconsolidated businesses Plant, property and equipment, net Capital expenditures 2004 External revenues Intersegment revenues Total operating revenues Cost of services and sales Selling, general & administrative expense Depreciation & amortization expense Total operating expenses Operating income Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Provision for income taxes Segment income Assets Investments in unconsolidated businesses Plant, property and equipment, net Capital expenditures 70 Wireline Domestic Wireless (dollars in millions) Total Segments $ $ $ $ $ $ $ $ $ 49,621 1,173 50,794 24,522 12,116 9,590 46,228 4,566 – 250 (2,062) – (1,120) 1,634 92,274 28 57,031 10,259 36,628 988 37,616 15,604 8,419 8,801 32,824 4,792 – 79 (1,701) – (1,264) 1,906 75,188 2 49,618 8,267 37,160 861 38,021 14,830 8,621 8,910 32,361 5,660 – 100 (1,602) – (1,506) 2,652 78,824 3 50,608 7,118 $ $ $ $ $ $ $ $ $ 37,930 113 38,043 11,491 12,039 4,913 28,443 9,600 19 4 (452) (4,038) (2,157) 2,976 81,989 87 24,659 6,618 32,219 82 32,301 9,393 10,768 4,760 24,921 7,380 27 6 (601) (2,995) (1,598) 2,219 76,729 154 22,790 6,484 27,586 76 27,662 7,747 9,591 4,486 21,824 5,838 45 11 (661) (2,323) (1,265) 1,645 68,027 148 20,516 5,633 $ 87,551 1,286 88,837 36,013 24,155 14,503 74,671 14,166 19 254 (2,514) (4,038) (3,277) $ 4,610 $ 174,263 115 81,690 16,877 $ 68,847 1,070 69,917 24,997 19,187 13,561 57,745 12,172 27 85 (2,302) (2,995) (2,862) $ 4,125 $ 151,917 156 72,408 14,751 $ 64,746 937 65,683 22,577 18,212 13,396 54,185 11,498 45 111 (2,263) (2,323) (2,771) 4,297 $ $ 146,851 151 71,124 12,751 Notes to Consolidated Financial Statements continued Reconciliation To Consolidated Financial Information A reconciliation of the results for the operating segments to the applicable line items in the consolidated financial statements is as follows: Operating Revenues Total reportable segments Hawaii operations Corporate, eliminations and other Consolidated operating revenues – reported Operating Expenses Total reportable segments Merger integration costs (see Note 4) Severance, pension and benefit charges (see Note 4) Verizon Center relocation, net (see Note 4) Former MCI exposure, lease impairment and other special items (see Note 4) Hawaii operations Sales of businesses and investments, net (see Notes 3 and 5) Corporate, eliminations and other Consolidated operating expenses – reported Net Income Segment income – reportable segments Debt extinguishment costs (see Note 11) Merger integration costs (see Note 4) Sales of businesses and investments, net (see Notes 3 and 5) Idearc spin-off costs (see Note 4) Severance, pension and benefit charges (see Note 4) Verizon Center relocation, net (see Note 4) Former MCI exposure, lease impairment and other special items (see Note 4) Tax benefits (see Note 4) Tax provision on repatriated earnings (see Note 4) Income from discontinued operations, net of tax (see Note 3) Cumulative effect of accounting change (see Note 1) Corporate and other Consolidated net income – reported Assets Total reportable segments Reconciling items Consolidated assets Financial information for Wireline excludes the effects of Hawaii access lines and directory operations sold in 2005. We generally account for intersegment sales of products and serv- ices and asset transfers at current market prices. We are not dependent on any single customer. 2006 88,837 – (693) 88,144 74,671 232 425 184 – – – (741) 74,771 4,610 (16) (146) (541) (101) (258) (118) – – – 1,398 (42) 1,411 6,197 $ $ $ $ $ $ 2005 69,917 180 (579) 69,518 57,745 – 157 (18) 125 118 (530) (660) 56,937 4,125 – – 336 – (95) 8 (133) 336 (206) 1,370 – 1,656 7,397 $ $ $ $ $ $ (dollars in millions) 2004 $ $ $ $ $ $ 65,683 529 (461) 65,751 54,185 – 805 – (91) 375 100 (493) 54,881 4,297 – – 1,059 – (499) – 2 234 – 1,423 – 1,315 7,831 $ 174,263 14,541 $ 188,804 $ 151,917 16,213 $ 168,130 $ 146,851 19,107 $ 165,958 Geographic Areas Our foreign investments are located principally in the Americas and Europe. Domestic and foreign operating revenues are based on the location of customers. Long-lived assets consist of plant, property and equipment (net of accumulated depreciation) and investments in unconsolidated businesses. The table below presents financial information by major geographic area: Years Ended December 31, 2006 (dollars in millions) 2004 2005 Domestic Operating revenues Long-lived assets Foreign Operating revenues Long-lived assets Consolidated Operating revenues Long-lived assets $ 84,693 $ 69,327 $ 65,659 72,488 82,277 74,813 3,451 4,947 191 2,776 92 4,973 88,144 87,224 69,518 77,589 65,751 77,461 71 Notes to Consolidated Financial Statements continued NOTE 18 COMPREHENSIVE INCOME Comprehensive income consists of net income and other gains and losses affecting shareowners’ investment that, under GAAP, are excluded from net income. Changes in the components of other comprehensive income (loss), net of income tax expense (benefit), are as follows: Years Ended December 31, Foreign Currency Translation Adjustments Unrealized Gains (Losses) on Net Investment Hedges Unrealized gains (losses), net of taxes of $–, $1 and $(48) Less reclassification adjustments for losses realized in net income, net of taxes of $–, $– and $(48) Net unrealized gains on net investment hedges Unrealized Derivative Gains (Losses) on Cash Flow Hedges Unrealized gains (losses), net of taxes of $–, $– and $(2) Less reclassification adjustments for (losses) realized in net income, net of taxes of $(1), $(2) and $(2) Net unrealized derivative gains on cash flow hedges Unrealized Gains (Losses) on Marketable Securities Unrealized gains, net of taxes of $30, $10 and $4 Less reclassification adjustments for gains realized in net income, net of taxes of $13, $14 and $1 Net unrealized gains (losses) on marketable securities Minimum Pension Liability Adjustment, net of taxes of $417, $37 and $(185) Defined benefit pension and postretirement plans – SFAS No. 158 adoption, net of taxes of $(5,591) Other, net of taxes of $(159), $(20) and $(53) Other Comprehensive Income (Loss) The foreign currency translation adjustment in 2006 represents the realization of the cumulative foreign currency translation loss of approximately $800 million in connection with the sale of our con- solidated interest in Verizon Dominicana (see Note 3), as well as unrealized gains from the appreciation of the functional currency on our investment in Vodafone Omnitel. The minimum pension liability adjustment in 2006 represents the adoption of SFAS No. 158. The foreign currency translation adjustment in 2005 represents unrealized losses from the decline in the functional currencies of our investments in Vodafone Omnitel, Verizon Dominicana and CANTV. The foreign currency translation adjustment in 2004 represents unrealized gains from the appreciation of the functional currencies at Verizon Dominicana and our investment in Vodafone Omnitel as well as the realization of the cumulative foreign currency translation loss in connection with the sale of our 20.5% interest in TELUS (see Note 4), partially offset by unrealized losses from the decline in the functional currency on our investment in CANTV. 2006 $ 1,196 2005 (dollars in millions) 2004 $ (755) $ 548 – – – 11 (3) 14 79 25 54 788 (7,671) (128) (5,747) $ $ 2 – 2 4 (6) 10 4 25 (21) 51 – (17) (730) (58) (58) – (9) (26) 17 8 1 7 (332) – (43) 197 $ During 2005, we entered into zero cost euro collars to hedge a por- tion of our net investment in Vodafone Omnitel. As of December 31, 2005, our positions in the zero cost euro collars have been settled. During 2004, we entered into foreign currency forward contracts to hedge our net investment in Verizon Information Services Canada and TELUS (see Note 3). In connection with the sales of these inter- ests in the fourth quarter of 2004, the unrealized losses on these net investment hedges were realized in net income along with the cor- responding foreign currency translation balance. As discussed in Note 15, we adopted SFAS No. 158 effective December 31, 2006, which resulted in a net decrease to share- owners’ investment of $6,883 million. The changes in the minimum pension liability in 2005 and 2004 were required by accounting rules for certain pension plans based on their funded status (see Note 15). In connection with our adop- tion of SFAS No. 158 on December 31, 2006, we no longer record a minimum pension liability adjustment as a discrete component of Accumulated Other Comprehensive Loss. 72 Notes to Consolidated Financial Statements continued The components of Accumulated Other Comprehensive Loss are as follows: NOTE 19 At December 31, Foreign currency translation adjustments Unrealized gains on net investment hedges Unrealized derivative losses on cash flow hedges Unrealized gains on marketable securities Minimum pension liability Defined benefit pension and postretirement plans – SFAS 158 adoption Other Accumulated other comprehensive loss 2006 329 2 $ (13) 64 – (dollars in millions) 2005 $ (867) 2 (27) 10 (788) ADDITIONAL FINANCIAL INFORMATION The tables that follow provide additional financial information related to our consolidated financial statements: Income Statement Information Years Ended December 31, 2006 (dollars in millions) 2004 2005 (7,671) (241) $ (7,530) – (113) $ (1,783) Depreciation expense Interest cost incurred Capitalized interest Advertising expense $ 13,122 $ 12,171 $ 12,169 2,513 (177) 1,617 2,811 (462) 2,271 2,481 (352) 1,844 As discussed above, the change in foreign currency translation adjustments during 2006 is due primarily to the sale of Verizon Dominicana (approximately $800 million). Foreign currency translation adjustments at year-end 2006 is primarily comprised of unrealized gains in the functional currencies at Vodafone Omnitel, partially offset by unrealized losses of approximately $400 million at CANTV. The reduction in our minimum pension liability adjustment balance to zero at year-end 2006 is due to the adoption of SFAS No. 158. Balance Sheet Information At December 31, Accounts Payable and Accrued Liabilities Accounts payable Accrued expenses Accrued vacation, salaries and wages Interest payable Accrued taxes Other Current Liabilities Advance billings and customer deposits Dividends payable Other Cash Flow Information Years Ended December 31, Cash Paid 2006 (dollars in millions) 2005 $ 4,392 2,982 3,575 614 2,757 $ 14,320 $ $ 2,226 1,199 4,666 8,091 $ 2,620 2,891 3,179 573 2,484 $ 11,747 $ 1,964 1,137 2,294 $ 5,395 2006 (dollars in millions) 2004 2005 Income taxes, net of amounts refunded $ Interest, net of amounts capitalized 3,299 $ 4,189 $ 2,103 2,025 152 2,226 Supplemental Investing and Financing Transactions Cash acquired in business combination Assets acquired in business combinations Liabilities assumed in business combinations Debt assumed in business combinations Shares issued to Price to acquire limited partnership interest in VZ East (Note 2) 2,361 – 18,511 635 7,813 6,169 35 9 1,007 – – 8 – – – 73 Notes to Consolidated Financial Statements continued NOTE 20 GUARANTEES OF OPERATING SUBSIDIARY DEBT Verizon has guaranteed the obligations of two wholly-owned operating subsidiaries: $480 million 7% debentures series B, due 2042 issued by Verizon New England Inc. and $300 million 7% debentures series F issued by Verizon South Inc. due 2041. These guarantees are full and unconditional and would require Verizon to make scheduled payments immediately if either of the two subsidiaries failed to do so. Both of these securities were issued in denominations of $25 and were sold primarily to retail investors and are listed on the New York Stock Exchange. SEC rules permit us to include condensed consolidating financial information for these two subsidiaries in our periodic SEC reports rather than filing separate subsidiary periodic SEC reports. Below is the condensed consolidating financial information. Verizon New England and Verizon South are presented in separate columns. The column labeled Parent represents Verizon’s investments in all of its subsidiaries under the equity method and the Other column rep- resents all other subsidiaries of Verizon on a combined basis. The Adjustments column reflects intercompany eliminations. Condensed Consolidating Statements of Income Year Ended December 31, 2006 Operating revenues Operating expenses Operating Income (Loss) Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Income (loss) before provision for income taxes, discontinued operations and cumulative effect of accounting change Income tax benefit (provision) Income (Loss) Before Discontinued Operations And Cumulative Effect Of Accounting Change Income on discontinued operations, net of tax Cumulative effect of accounting change, net of tax Net Income Condensed Consolidating Statements of Income Year Ended December 31, 2005 Operating revenues Operating expenses Operating Income (Loss) Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Income before provision for income taxes and discontinued operations Income tax benefit (provision) Income Before Discontinued Operations Income on discontinued operations, net of tax Net Income 74 Parent – 164 (164) 6,011 1,579 (1,185) – 6,241 33 6,274 (77) – 6,197 Verizon New England $ 3,852 3,685 167 14 11 (174) – 18 (19) (1) – – (1) $ Parent Verizon New England – 8 (8) 6,698 537 (58) – 7,169 228 7,397 – 7,397 $ 3,936 3,628 308 23 (4) (172) – 155 (40) 115 – 115 $ $ $ $ $ Verizon South Other Adjustments Total (dollars in millions) 858 634 224 – 14 (54) – 184 (68) 116 – – 116 $ 84,208 71,062 13,146 $ (708) 283 (961) (4,038) 7,722 (2,620) 5,102 836 (774) (774) – (4,544) (1,492) 25 – (6,011) – (6,011) – $ 88,144 74,771 13,373 773 395 (2,349) (4,038) 8,154 (2,674) 5,480 759 (42) 5,896 $ – (6,011) $ (42) 6,197 $ Verizon South Other Adjustments Total (dollars in millions) 907 684 223 – 6 (63) – 166 (62) 104 – 104 $ 65,172 53,114 12,058 $ 273 180 (1,854) (3,001) 7,656 (2,547) 5,109 (497) (497) – (6,308) (408) 18 – (6,698) – (6,698) $ 69,518 56,937 12,581 686 311 (2,129) (3,001) 8,448 (2,421) 6,027 1,370 6,479 $ – (6,698) $ 1,370 7,397 $ $ $ $ $ Notes to Consolidated Financial Statements continued Condensed Consolidating Statements of Income Year Ended December 31, 2004 Operating revenues Operating expenses Operating Income (Loss) Equity in earnings of unconsolidated businesses Other income and (expense), net Interest expense Minority interest Income before provision for income taxes and discontinued operations Income tax benefit (provision) Income Before Discontinued Operations Income (loss) on discontinued operations, $ Parent – 260 (260) 7,714 171 (20) – 7,605 229 7,834 net of tax Net Income (3) 7,831 $ $ Verizon New England $ 3,955 3,664 291 59 8 (165) – 193 (50) 143 – 143 Condensed Consolidating Balance Sheets At December 31, 2006 Cash Short-term investments Accounts receivable, net Other current assets Total current assets Plant, property and equipment, net Investments in unconsolidated businesses Other assets Total Assets Debt maturing within one year Other current liabilities Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Total shareowners’ investment Total Liabilities and Shareowners’ Parent $ – – 4 32,680 32,684 1 44,048 5,045 $ 81,778 $ 6,735 2,354 9,089 11,392 12,419 337 6 – 48,535 Verizon New England $ $ $ – 215 705 134 1,054 6,165 116 288 7,623 333 1,032 1,365 2,573 1,625 560 111 – 1,389 Verizon South Other Adjustments Total (dollars in millions) $ $ $ $ $ 934 717 217 – 7 (63) – 161 (34) 127 – 127 Verizon South – 33 104 28 165 1,120 – 389 1,674 232 182 414 417 259 203 19 – 362 $ 61,224 50,602 10,622 $ 1,437 98 (2,096) (2,329) 7,732 (2,223) 5,509 (362) (362) – (7,520) (202) 8 – (7,714) – (7,714) $ 65,751 54,881 10,870 1,690 82 (2,336) (2,329) 7,977 (2,078) 5,899 1,935 7,444 $ – (7,714) $ 1,932 7,831 $ Other Adjustments Total (dollars in millions) $ 3,219 2,186 10,999 5,830 22,234 75,070 7,488 73,550 $ 178,342 $ 33,302 21,709 55,011 14,494 16,476 15,170 3,821 28,337 45,033 $ – – (921) (32,678) (33,599) – (46,784) (230) $ (80,613) $ (32,887) (712) (33,599) (230) – – – – (46,784) $ 3,219 2,434 10,891 5,994 22,538 82,356 4,868 79,042 $ 188,804 $ 7,715 24,565 32,280 28,646 30,779 16,270 3,957 28,337 48,535 Investment $ 81,778 $ 7,623 $ 1,674 $ 178,342 $ (80,613) $ 188,804 75 Notes to Consolidated Financial Statements continued Condensed Consolidating Balance Sheets At December 31, 2005 Cash Short-term investments Accounts receivable, net Other current assets Total current assets Plant, property and equipment, net Investments in unconsolidated businesses Other assets Total Assets Debt maturing within one year Other current liabilities Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Total shareowners’ investment Total Liabilities and Shareowners’ Investment Parent $ – – 20 9,365 9,385 1 32,593 532 $ 42,511 $ 22 2,511 2,533 92 205 – 1 – 39,680 Verizon New England Verizon South Other Adjustments Total (dollars in millions) $ $ $ – 216 910 166 1,292 6,146 116 472 8,026 471 1,049 1,520 2,702 1,892 537 146 – 1,229 $ $ $ – 32 142 185 359 1,158 – 390 1,907 – 176 176 901 254 220 27 – 329 $ 760 1,898 8,792 7,661 19,111 65,682 10,015 70,057 $ 164,865 $ 15,999 17,299 33,298 28,104 15,342 22,074 3,050 26,433 36,564 $ – – (1,330) (9,497) (10,827) – (38,122) (230) $ (49,179) $ (9,804) (1,023) (10,827) (230) – – – – (38,122) $ 760 2,146 8,534 7,880 19,320 72,987 4,602 71,221 $ 168,130 $ 6,688 20,012 26,700 31,569 17,693 22,831 3,224 26,433 39,680 $ 42,511 $ 8,026 $ 1,907 $ 164,865 $ (49,179) $ 168,130 Condensed Consolidating Statements of Cash Flows Year Ended December 31, 2006 Net cash from operating activities Net cash from investing activities Net cash from financing activities Net Increase in Cash $ $ Condensed Consolidating Statements of Cash Flows Year Ended December 31, 2005 Net cash from operating activities Net cash from investing activities Net cash from financing activities Net Decrease in Cash $ $ Condensed Consolidating Statements of Cash Flows Year Ended December 31, 2004 Net cash from operating activities Net cash from investing activities Net cash from financing activities Net Increase in Cash $ $ Parent 5,919 (779) (5,140) – Parent 7,605 (913) (6,692) – Parent 6,650 – (6,650) – Verizon New England $ $ 1,211 (919) (292) – Verizon New England $ $ 831 (784) (47) – Verizon New England $ $ 1,219 (655) (564) – Verizon South 311 15 (326) – Verizon South 284 (221) (63) – Verizon South 282 (75) (207) – $ $ $ $ $ $ (dollars in millions) Other Adjustments Total $ 22,260 (14,032) (5,769) 2,459 $ $ $ (5,595) 99 5,496 – $ 24,106 (15,616) (6,031) 2,459 $ (dollars in millions) Other Adjustments Total $ 20,242 (16,343) (5,400) (1,501) $ $ $ (6,937) (231) 7,168 – $ 22,025 (18,492) (5,034) (1,501) $ (dollars in millions) Other Adjustments Total $ 20,104 (9,559) (8,953) 1,592 $ $ $ (6,464) (54) 6,518 – $ 21,791 (10,343) (9,856) 1,592 $ 76 Notes to Consolidated Financial Statements continued NOTE 21 COMMITMENTS AND CONTINGENCIES Several state and federal regulatory proceedings may require our telephone operations to pay penalties or to refund to customers a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal actions, including environmental matters, that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods, including the Hicksville matters described below, will have a material effect on our financial condition, but it could have a material effect on our results of operations. During 2003, under a government-approved plan, remediation com- menced at the site of a former Sylvania facility in Hicksville, New York that processed nuclear fuel rods in the 1950s and 1960s. Remediation beyond original expectations proved to be necessary and a reassessment of the anticipated remediation costs was con- ducted. A reassessment of costs related to remediation efforts at several other former facilities was also undertaken. In September 2005 the Army Corps of Engineers (ACE) accepted the Hicksville site into the Formerly Utilized Sites Remedial Action Program. This may result in the ACE performing some or all of the remediation effort for the Hicksville site with a corresponding decrease in costs to Verizon. To the extent that the ACE assumes responsibility for remedial work at the Hicksville site, an adjustment to a reserve previously estab- lished for the remediation may be made. Adjustments may also be made based upon actual conditions discovered during the remedia- tion at any of the sites requiring remediation. There are also litigation matters associated with the Hicksville site pri- marily involving personal injury claims in connection with alleged emissions arising from operations in the 1950s and 1960s at the Hicksville site. These matters are in various stages, and no trial date has been set. In connection with the execution of agreements for the sales of busi- nesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinan- cial matters, such as ownership of the securities being sold, as well as financial losses. Subsequent to the sale of Verizon Information Services Canada (see Note 3), we continue to provide a guarantee to publish directories, which was issued when the directory business was purchased in 2001 and had a 30-year term (before extensions). The preexisting guarantee continues, without modification, following the sale of Verizon Information Services Canada. As a result of the Idearc spin- off, we continue to be responsible for this guarantee. The possible financial impact of the guarantee, which is not expected to be adverse, cannot be reasonably estimated since a variety of the potential outcomes available under the guarantee result in costs and revenues or benefits that may offset. In addition, performance under the guarantee is not likely. As of December 31, 2006, letters of credit totaling $223 million had been executed in the normal course of business, which support sev- eral financing arrangements and payment obligations to third parties. We have several commitments primarily to purchase network serv- ices, equipment and software from a variety of suppliers totaling $812 million. Of this total amount, $566 million, $164 million, $53 million, $11 million, $5 million and $13 million are expected to be purchased in 2007, 2008, 2009, 2010, 2011 and thereafter, respectively. 77 Notes to Consolidated Financial Statements continued NOTE 22 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarter Ended 2006 March 31 June 30 September 30 December 31 2005 March 31 June 30 September 30 December 31 Operating Revenues Operating Income $ 21,221 21,876 22,449 22,598 $ 16,785 17,177 17,629 17,927 $ 3,175 3,217 3,537 3,444 $ 2,828 3,561 3,040 3,152 (dollars in millions, except per share amounts) Income Before Discontinued Operations Amount Per Share- Basic Per Share- Diluted $ 1,282 1,263 1,545 1,390 $ 1,407 1,804 1,506 1,310 $ $ .44 .43 .53 .48 .51 .65 .54 .47 $ $ .44 .43 .53 .48 .50 .65 .54 .47 Net Income $ 1,632 1,611 1,922 1,032 $ 1,757 2,113 1,869 1,658 • Results of operations for the first quarter of 2006 include after-tax charges of $16 million for the early extinguishment of debt related to the MCI merger, $28 million for costs associ- ated with the relocation to Verizon Center, $42 million for the impact of accounting for share based payments, and $35 million for merger integration costs. • Results of operations for the second quarter of 2006 include after-tax charges of $48 million for merger integration costs, $29 million for costs associated with the relocation to Verizon Center and $186 million for severance, pension and benefits charges. • Results of operations for the third quarter of 2006 include after-tax charges of $16 million for merger integration costs, $31 million for costs associated with the relocation to Verizon Center and $17 million for severance, pension and benefits charges. • Results of operations for the fourth quarter of 2006 include after-tax charges of $47 million for merger integration costs, $30 million for costs associated with the relocation to Verizon Center, $55 million severance, pension and benefits charges, $541 million for the loss on sale of Verizon Dominicana included in discontinued operations, and $101 million for costs associated with the spin-off of our directories publishing business. • Results of operations for the second quarter of 2005 include a $336 million net after-tax gain on the sale of our wireline and directory businesses in Hawaii, tax benefits of $242 mil- lion associated with prior investment losses and a net tax provision of $206 million related to the repatriation of foreign earnings under the provisions of the American Jobs Creation Act of 2004. • Results of operations for the third quarter of 2005 include an impairment charge of $125 million pertaining to our leasing operations for aircraft leased to airlines experiencing financial difficulties. Income before discontinued operations per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount. 78 Notes to Consolidated Financial Statements continued NOTE 23 SUBSEQUENT EVENTS Disposition of Businesses and Investments Telephone Access Lines Spin-off On January 16, 2007, we announced a definitive agreement with FairPoint Communications, Inc. (FairPoint) that will result in Verizon establishing a separate entity for its local exchange and related business assets in Maine, New Hampshire and Vermont, spinning off that new entity to Verizon shareowners, and immediately merging it with and into FairPoint. Upon the closing of the transaction, Verizon shareowners will own approximately 60 percent of the new company and FairPoint stockholders will own approximately 40 percent. Verizon Communications will not own any shares in FairPoint after the merger. In connection with the merger, Verizon shareowners will receive one share of FairPoint stock for approximately every 55 shares of Verizon stock held as of the record date. Both the spin-off and merger are expected to qualify as tax-free transactions, except to the extent that cash is paid to Verizon shareowners in lieu of frac- tional shares. The total value to be received by Verizon and its shareowners in exchange for these operations will be approximately $2,715 million. Verizon shareowners will receive approximately $1,015 million of FairPoint common stock in the merger, based upon FairPoint’s recent stock price and the terms of the merger agreement. Verizon will receive $1,700 million in value through a combination of cash distri- butions to Verizon and debt securities issued to Verizon prior to the spin-off. Verizon may exchange these newly issued debt securities for certain debt that was previously issued by Verizon, which would have the effect of reducing Verizon’s then-outstanding debt. CANTV During the second quarter of 2006, we entered into a definitive agreement to sell our indirect 28.5% interest in CANTV to an entity jointly owned by América Móvil and Telmex for estimated pretax proceeds of $677 million. Regulatory authorities in Venezuela never commenced the formal review of that transaction and the related tender offers for the remaining equity securities of CANTV. On February 8, 2007, after two prior extensions, the parties terminated the stock purchase agreement because the parties mutually con- cluded that the regulatory approvals would not be granted by the Government. In January 2007, the Bolivarian Republic of Venezuela (the Republic) declared its intent to nationalize certain companies, including CANTV. On February 12, 2007, we entered into a Memorandum of Understanding (MOU) with the Republic. The MOU provides that the Republic will offer to purchase all of the equity securities of CANTV through public tender offers in Venezuela and the United States at a price equivalent to $17.85 per ADS. If the tender offers are completed, the aggregate purchase price for Verizon’s shares would be $572 million. If the 2007 dividend that has been recommended by the CANTV Board is approved by shareholders and paid prior to the closing of the tender offers, this amount will be reduced by the amount of the dividend. Verizon has agreed to tender its shares if the offers are commenced. The Republic has agreed to commence the offers within forty-five days assuming the satisfactory completion of its due diligence investiga- tion of CANTV. The tender offers are subject to certain conditions including that a majority of the outstanding shares are tendered to the Government and receipt of regulatory approvals. Based upon the terms of the MOU and our current investment balance in CANTV, we expect that we will record a loss on our investment in the first quarter of 2007. The ultimate amount of the loss depends on a variety of factors, including the successful completion of the tender offer and the satisfaction of other terms in the MOU. Redemption of Debt On January 8, 2007, we redeemed the remaining $1,580 million of the outstanding Verizon Communications Inc. floating rate notes due 2007. The gain/(loss) on this redemption was immaterial. 79 Board of Directors James R. Barker Chairman The Interlake Steamship Co. and New England Fast Ferry Co. and Vice Chairman Mormac Marine Group, Inc. and Moran Towing Corporation Richard L. Carrión Chairman, President and Chief Executive Officer Popular, Inc. and Chairman and Chief Executive Officer Banco Popular de Puerto Rico M. Frances Keeth Retired Executive Vice President Royal Dutch Shell plc Robert W. Lane Chairman and Chief Executive Officer Deere & Company Sandra O. Moose President Strategic Advisory Services LLC Joseph Neubauer Chairman and Chief Executive Officer ARAMARK Holdings Corporation Donald T. Nicolaisen Former Chief Accountant United States Securities and Exchange Commission Thomas H. O’Brien Retired Chairman and Chief Executive Officer The PNC Financial Services Group, Inc. and PNC Bank, N.A. Clarence Otis, Jr. Chairman and Chief Executive Officer Darden Restaurants, Inc. Hugh B. Price Senior Fellow Brookings Institution Ivan G. Seidenberg Chairman and Chief Executive Officer Verizon Communications Inc. Walter V. Shipley Retired Chairman The Chase Manhattan Corporation John W. Snow President JWS Associates, LLC John R. Stafford Retired Chairman of the Board Wyeth Robert D. Storey Retired Partner Thompson Hine LLP Corporate Officers and Executive Leadership Ivan G. Seidenberg Chairman and Chief Executive Officer Dennis F. Strigl President and Chief Operating Officer Doreen A. Toben Executive Vice President and Chief Financial Officer William P. Barr Executive Vice President and General Counsel John W. Diercksen Executive Vice President – Strategy, Development and Planning Shaygan Kheradpir Executive Vice President and Chief Information Officer Lowell C. McAdam Executive Vice President and President and Chief Executive Officer – Verizon Wireless Marc C. Reed Executive Vice President – Human Resources John G. Stratton Executive Vice President and Chief Marketing Officer Thomas J. Tauke Executive Vice President – Public Affairs, Policy and Communications Thomas A. Bartlett Senior Vice President and Controller Marianne Drost Senior Vice President, Deputy General Counsel and Corporate Secretary Ronald H. Lataille Senior Vice President – Investor Relations Kathleen H. Leidheiser Senior Vice President – Internal Auditing Catherine T. Webster Senior Vice President and Treasurer John F. Killian President – Verizon Business Daniel S. Mead President – Verizon Services Daniel C. Petri President – International Virginia P. Ruesterholz President – Verizon Telecom 80 Investor Information Registered Shareowner Services Questions or requests for assistance regarding changes to or transfers of your registered stock ownership should be directed to our transfer agent, Computershare Trust Company, N.A. at: Verizon Communications Shareowner Services c/o Computershare P.O. Box 43078 Providence, RI 02940-3078 Phone: 800 631-2355 Website: www.computershare.com/verizon Email: verizon@computershare.com Persons outside the U.S. may call: 781 575-3994 Persons using a telecommunications device for the deaf (TDD) may call: 800 524-9955 On-line Account Access – Registered shareowners can view account information on-line at: www.computershare.com/verizon You will need your account number, a password and taxpayer identification number to enroll. For more information, contact Computershare. Electronic Delivery of Proxy Materials – Registered share- owners can receive their Annual Report, Proxy Statement and Proxy Card on-line, instead of receiving printed materials by mail. Enroll at www.computershare.com/verizon Direct Dividend Deposit Service – Verizon offers an elec- tronic funds transfer service to registered shareowners wishing to deposit dividends directly into savings or checking accounts on dividend payment dates. For more information, contact Computershare. Direct Invest Stock Purchase and Ownership Plan – Verizon offers a direct stock purchase and share ownership plan. The plan allows current and new investors to purchase common stock and to reinvest the dividends toward the purchase of addi- tional shares. To receive a Plan Prospectus and enrollment form, contact Computershare or visit their website. eTree® Program – Worldwide, Verizon is acting to conserve natural resources in a variety of ways. Now we are proud to offer shareholders an opportunity to be environmentally responsible. By receiving links to shareholder materials online, you can help Verizon reduce the amount of materials we print and mail. As a thank you for choosing electronic delivery, Verizon will plant a tree on your behalf. It’s fast and easy and you can change your electronic delivery options at any time. Sign up at www.eTree.com/verizon or call 800 631-2355 or 781 575-3994. Corporate Governance Verizon’s Corporate Governance Guidelines are available on our website – www.verizon.com/investor If you would prefer to receive a printed copy in the mail, please contact the Assistant Corporate Secretary: Verizon Communications Inc. Assistant Corporate Secretary 140 West Street, 29th Floor New York, NY 10007 Investor Services Investor Website – Get company information and news on our website – www.verizon.com/investor VZ Mail – Get the latest investor information delivered directly to your computer desktop. Subscribe to VzMail at our investor infor- mation website. Stock Market Information Shareowners of record at December 31, 2006: 887,678 Verizon is listed on the New York Stock Exchange (ticker symbol: VZ) Also listed on the Philadelphia, Boston, Chicago, London, Swiss, Amsterdam and Frankfurt exchanges. Common Stock Price and Dividend Information 2006 First Quarter Second Quarter Third Quarter Fourth Quarter 2005 First Quarter Second Quarter Third Quarter Fourth Quarter Market Price High 33.89 33.46 36.62 37.64 39.56 34.93 33.70 31.59 $ $ Low 28.95 29.00 30.22 33.99 33.13 32.48 30.50 28.07 $ $ Cash Dividend Declared 0.405 0.405 0.405 0.405 0.405 0.405 0.405 0.405 $ $ *All Verizon prices have been adjusted for the spin-off of Idearc. Form 10–K To receive a copy of the 2006 Verizon Annual Report on Form 10-K, which is filed with the Securities and Exchange Commission, contact Investor Relations: Verizon Communications Inc. Investor Relations One Verizon Way Basking Ridge, NJ 07920 Phone: 212 395-1525 Certifications Regarding Public Disclosures & Listing Standards The 2006 Verizon Annual Report on Form 10-K filed with the Securities and Exchange Commission includes the certifications required by Section 302 of the Sarbanes-Oxley Act regarding the quality of the company’s public disclosure. In addition, the annual certification of the chief executive officer regarding compliance by Verizon with the corporate governance listing standards of the New York Stock Exchange was submitted without qualification following the 2006 annual meeting of shareholders. Equal Opportunity Policy The company maintains a long-standing commitment to equal opportunity and valuing the diversity of its employees, suppliers and customers. Verizon is fully committed to a workplace free from discrimination and harassment for all persons, without regard to race, color, religion, age, gender, national origin, sexual orientation, marital status, citizenship status, veteran status, disability or other protected classifications. Verizon Communications Inc. 140 West Street New York, New York 10007 212 395-1000 ©2007. Verizon. All Rights Reserved. 002CS-13417 Printed on recycled paper verizon.com